4.1 PFI agreements cover the design, build, finance and operation of the hospital. Although hospital requirements are specified in PFI contracts it is inevitable that changes will continually need to be made over the course of 25 to 30 years operation to the services and the asset provided. However, PFI contracts have been expensive and difficult to manage and change post procurement. Operational changes cost the taxpayer around £180 million in 2006 alone.19
4.2 In PFI projects, all change requests (to both services and the asset) have to be processed through SPVs which have increasingly sought to charge additional management fees for processing such requests. The NAO found that SPVs had sometimes acted unreasonably in attempting to impose management fees for small changes, "occasionally employing spurious arguments and not relating fees to work done".20 Management fees are said to cost taxpayers £6 million annually and hundreds of operational PFIs are thought to still be paying unjustified fees despite 2007 Treasury guidance advice to the contrary.21
4.3 The NAO found that processing and making changes is "often costly and can take longer than expected".22 Large variations in the cost of making similar minor changes across PFI projects, and in checking that costs were reasonable have been found.23
4.4 There have also been challenges making large changes, particularly where the public sector lacks the option of going to a different supplier. In 2006 major changes costing £100,000 or more accounted for 90% of the overall cost of operational PFI changes. 27% of these large changes (worth £84 million) might have been suitable for competitive tendering but were let without competition.24 This potentially reduces the public sector's leverage in change negotiations and again highlights concerns about achieving value for money.
6. How should future payments by the Government under existing Private Finance contracts be recorded in public sector accounts? Is risk transfer an appropriate test? Should all such liabilities be included in the national debt? Should they be accounted for separately from government debt? How much does the public sector accounting treatment of capital and revenue aspects of projects matter?
6.1 Powerful motivation for the Government's approval of PFI is that it enables the Treasury to borrow money without the debt appearing on the public balance sheet. The BMA has previously called on the government to "include future debts to PFI companies when calculating the NHS deficit."25 In principle the BMA believes that Government finances should be transparent and accountable to tax-payers. The Government should ensure the public has a proper account of the rates of return and profits of PFI contracts and it must reveal the true scale of PFI debt and current and future liabilities. As the Economist has written, the case for PFI "would be more convincing without cooking the books."26
7. Would public sector investment in the last decade have been lower without Private Finance? If so, by how much?
7.1 Since Labour was elected 1997, PFI has been the favoured procurement mechanism for investment in the buildings and infrastructure of the NHS. PFI schemes have been at the centre of the hospital building programme which has seen a significant improvement in the condition of the NHS physical stock since the mid 1990s. Nonetheless, there are flaws to the argument that PFI has allowed a level of investment in public sector infrastructure that would not have been possible otherwise.
7.2 Firstly, the Government's preference for PFI meant that it was viewed as "the only game in town" for the last decade. In theory projects are to be value tested against what the project would cost under public finance. If this process concludes that private finance does not represent value for money a public procurement method is supposed to be chosen. However, in a context where PFI is the only funding available and many NHS hospitals are in need of capital works, managers have faced "perverse" incentives to "manipulate" their assessments27 and subsequently we have seen a proliferation of PFI projects.28
7.3 Secondly, PFI projects still involve substantial public sector investment by the Government just as public procurement would have. While PFI alters the timing of payments to creditors by having private companies meet the upfront capital cost of the infrastructure it does not reduce or eliminate payments.29 The Government still has to make repayments over the life of the PFI contract. Rather than a way of increasing investment, PFI projects are an expensive and short-sighted means of refurbishing and building new hospitals.
8. How much impact has the financial crisis had on launching new Private Finance projects? Is the crisis likely to have a permanent effect on the Private Finance market?
8.1 The financial crisis has had a significant impact on launching new PFI projects30 and now is the time for the Government to rethink its involvement in such schemes. The traditional source of PFI finance came from the international bond market which has since contracted. The other alternative to raising finance is via a bank loan. However, the financial crisis also adversely impacted on the banking industry and the availability of credit. Given current volatility in the global markets banks appear reluctant to lend for long periods of time which is an essential element of PFI.
8.2 The Treasury has recently set up a special unit to lend PFI projects money as private firms have been struggling to secure funding from banks because of the credit crisis. It has been reported that this miniature infrastructure bank within the Treasury will provide up to £2 billion in public finance.31 As a result public finances are bailing out PFI projects. This is despite the fact that PFI was introduced and promoted as more robust than public procurement, and as a solution to a lack of availability of public finance for public infrastructure programs.
9. Are there realistic alterative roles for private finance than the current PFI-type private finance models? Should the UK be aiming for more diversity in private finance models? Would a national infrastructure bank (such as the proposed Dodd-Hagel NIB in the US) add any value in the UK? Should the public sector have a more hands on role in financing and/or delivery? And
10. Is there an optimal mix between conventional public procurement and Private Finance for public sector investment? What is the long run role of Private Finance in the delivery of infrastructure both in the UK and globally?
9.1 It is inevitable that the NHS Estate will need upgrading and ongoing maintenance into the future. The BMA maintains that PFI is an unnecessarily costly and short-sighted procurement method. The BMA has previously called on the government to "put a halt to any further PFI schemes" and "introduce and deliver a policy of public ownership of all future NHS hospitals."32 This year the BMA requested that the government "bring PFIs into public ownership."33
9.2 The BMA is committed to supporting an NHS that is publicly funded through central taxes, publicly provided and publicly accountable, that seeks value for money but puts the care of patients before financial targets, and significantly reduces commercial involvement.34 The smart use of public procurement of public services would be one step in ensuring that public money was being used to provide quality healthcare to the benefit of patients and the public, and not profits for shareholders.
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19 National Audit Office (2008) Making Changes in Operational PFI projects, London: The Stationary Office at p 4. Available at http://www.nao.org.uk/publications/0708/making_changes_operational_pfi.aspx.
20 National Audit Office (2008) Making Changes in Operational PFI projects, London: The Stationary Office at p 17. Available at http://www.nao.org.uk/publications/0708/making_changes_operational_pfi.aspx.
21 House of Commons Committee of Public Accounts (2008) HM Treasury: Making changes in operational PFI projects. Thirty-sixth Report of Session 2007-08, London: The Stationary Office at p 13. Available at http://www.publications.parliament.uk/pa/cm200708/ cmselect/cmpubacc/332/33202.htm
22 National Audit Office (2008) Making Changes in Operational PFI projects, London: The Stationary Office at p 12. Available at http://www.nao.org.uk/publications/0708/making_changes_operational_pfi.aspx.
23 House of Commons Committee of Public Accounts (2008) HM Treasury: Making changes in operational PFI projects. Thirty-sixth Report of Session 2007-08, London: The Stationary Office at p 14. Available at http://www.publications.parliament.uk/pa/cm200708/ cmselect/cmpubacc/332/33202.htm
24 National Audit Office (2008) Making Changes in Operational PFI projects, London: The Stationary Office at p 13. Available at http://www.nao.org.uk/publications/0708/making_changes_operational_pfi.aspx.
25 2007 BMA Annual Representative Meeting Resolution.
26 The Economist (2009) PFI deals in recession: singing the blues, The Economist, 4 July, at p 29.
27 Hellowell M, and Pollock A, (2009) The Private Financing of NHS Hospitals: Politics, Policy and Practice, Economic Affairs, Vol 29, Issue 1, pp 13-19, March 2009 at p 15.
28 Greener I, (2009) Healthcare in the UK: Understanding continuity and change, Bristol: Policy Press.
29 Hellowell M, and Pollock A, (2009) The Private Financing of NHS Hospitals: Politics, Policy and Practice, Economic Affairs, Vol 29, Issue 1, pp 13-19, March 2009 at p 14.
30 See Wright S, (2009) Is PFI funding built to last? Health Service Journal, 6 August at pp 16-17 and The Economist (2009) PFI deals in recession: singing the blues, The Economist, 4 July, p 28-29.
31 The Economist (2009) PFI deals in recession: singing the blues, The Economist, 4 July, at p 28.
32 2007 BMA Annual Representative Meeting Resolution.
33 2009 BMA Annual Representative Meeting Resolution.
34 For more information regarding the BMA's campaign visit www.lookafterournhs.org.uk