Q553 Chairman: Ms Jaffe, Mr Watson and Dr Porter, thank you for coming. Would you like to make an opening statement or shall we move straight to questions?
Dr Porter: We have sent in a written submission. I am happy to rest on that and take your questions, thank you.
Ms Jaffe: My colleague is from the BMA. I am Margie Jaffe from UNISON. Our evidence was separate evidence, so perhaps I could make an opening statement.
Q554 Chairman: By all means.
Ms Jaffe: Thank you very much for inviting us, because the workforce are not always considered in these issues. We see the services as essential to PFI and the workforce provide the services. We wanted to raise that with you. UNISON, in case you do not know, is the largest public service union. We cover health, education, local government, police, utilities, the services that are covered by PFI-and we have many members working in PFI projects and we would like to bring you their experience today. We have taken an evidence-based approach to PFI now since it started. We have produced more than 20 reports. We have worked with academics and other professionals who have come to us really as a focal point of dissent. I am a policy officer responsible for our approach to PFI and my colleague Simon Watson is a specialist in local government.
Q555 Chairman: We have had a lot of witnesses who have been in favour of PFIs and some witnesses who have distinctly not been in favour of PFIs. Reading your written material, you come within the latter camp, if I might put it that way. To the extent that you really do have big concerns about these projects, what do you see as the major problems?
Ms Jaffe: The major problems are the higher costs. These higher costs are in repayments, in the cost of finance, in the way the costs escalate between outline business case and final business case, in that paying for what we think are large returns that the consortia make -and this is all evidenced by reports from the National Audit Office, Audit Scotland and so on. What really matters to us is that these higher costs then lead on to affordability problems which put huge pressure on the projects. If there is an affordability problem, then the projects get cut back, not necessarily by the service needs (for example, the number of beds might be cut, the number of classrooms can be minimised in schools) and it also puts huge pressure to cut the service costs, which is where our members come in, and there is a huge downward pressure on the number of jobs and the terms and conditions of the workforce. This is of great concern to us. It has a differential effect on women, because the services that are mostly part of PFI projects (cleaning, catering) are women's jobs to a large extent. The Equal Opportunities Commission did a study to show that this was true. We are very concerned because the Treasury did clearly state that they did not want PFI to be at the expense of the terms and conditions of the workforce and we very much welcomed that, but they have never checked whether it is and taken any action to monitor it or to evaluate that policy. The final thing that concerns us is the inflexibility of PFI, the fact, as you have heard from the specialists before us, policies change but PFI cannot adapt to them as readily as non PFI. Priorities change and we think that you are locked into very long contracts that are very difficult to adapt to the changing world of policy and politics.
Dr Porter: We feel that there is relatively little evidence that risk has been successfully and properly transferred, as is meant to be the headline of this policy. The risk has been successfully transferred to the private sector on a number of occasions when this has been shown with one or two egregious examples; for example, the Norfolk and Norwich Hospital, where the transfer was handled in such a way that the private sector was able to make quite a high profit. We feel that one of the things that characterises PFI is an excessive profit-and I am not against private profit as such, but an excessive profit for private sector partners-that is effectively underwritten by government guarantee. Another major area or problem was brought out very well by Mr Coates, who was sitting in this seat a few minutes ago. He said, "PFI is not a good contract for delivering complex services that change and develop with time." I can only agree with that. I would perhaps add to it slightly, that carving out part of a complex service is probably going against what he has said there. Trying to carve out part of a hospital's operations and make that private while the rest of it remains public is leading to a number of tensions and inflexibilities in terms of the operation of the contract. The single greatest risk that is never talked about and never transferred, is the risk that operations will change with time, that over the 30 to 35 year life of a PFI hospital contract, the treatments will change. Not overall. I am not talking about the abandonment of a hospital and walking out and throwing away the key and that sort of thing. That would be clearly absurd. That should never happen either under public sector financing or under private financing initiative. The way in which hospitals have developed traditionally with time: new treatments have been introduced in certain areas; bits of the hospital have been updated; new units have been built; new units have been opened. During the 30 to 35 year lifetime of a hospital, it is inevitable that certain areas will progress one after the other and that parts of the hospital will need to be adapted. All of that becomes much, much more difficult when the operation and running of the hospital, which we believe is part of the complex service, when that operation and running is outsourced to the private sector and bound by the contracts which run into many thousands of pages, and it is that failure to transfer the risk of future change that really is possibly the worst aspect of it from our point of view. The contracts do not allow for the appropriate change and development of clinical services with time.
Q556 Chairman: What I am not quite clear about is whether you believe that there are things which are inherently difficult about PFIs or whether you are really saying that the current state-of-the-art of PFIs is deficient. For example, on the argument about higher costs, PFIs are meant to go through the hurdle of the public sector comparator in terms of costs and if they get over that hurdle then they should not be at higher costs, so that would argue that this was an issue of the state of the art rather than something inherent. Are your arguments about the state of art or inherent difficulties?
Dr Porter: It is difficult to say. What would we say if PFI changed a bit, would we still be against it? If PFI changed a bit, it would not be PFI. We are here to talk about the problems that this particular mode of financing and delivering services brings. Many of our members have been involved in PFI projects. As you would expect consultants are effectively some of the senior managers of a hospital in that they dispose of resources and there is a lot of clinical consultation in terms of the design of projects from start to end, so we have a lot of experience in how these projects have been running. One of the observations that characterises all projects is that two things are communicated very effectively to the chairman of a trust, to the chief executive and to the board and then onwards transmission to everybody involved in a project. Those two things are firstly that PFI is the only game in town, and I heard you quoting that earlier on and it is entirely true; that is what is told to everybody. The other thing that we are told is that the PSC has to be done but unless the PFI comes in cheaper than the PSC, there will be no new hospital, there will be no project and no build. We have seen one or two high profile projects collapse because they could not be made to work in that way. On the whole, I think the transmission of those two pieces of information to everybody involved in a project sets up what one might see as an irresistible force designed to produce the answer that PFI is indeed cheaper than the public sector comparator. The way in which this can be done is given by another answer you were given a moment ago, which is that the risk transfer and public sector comparator is more of an art than a science. I would agree with that, having seen a number of these projects taken through. I would agree that estimating the financial cost for the transfer of almost unquantifiable risks is indeed an art. The whole art of PFI is to make sure that it comes in under the PSC.
Q557 Lord MacGregor of Pulham Market: A lot of our witnesses have said that PFI projects have enabled far more investment in public services than would otherwise have occurred in the same timescale. Your comments please.
Ms Jaffe: We would say that is just a political choice. The Government chose to use private finance and they could equally have chosen to use a different vehicle. We know that the total bill at the moment, the total capital for PFI is £64 billion. The money that has been lent, borrowed to bail out the banks is measured in the trillions, so where there is a will there is a way, and we absolutely think that it is a political choice. You have to offset that against what so many critics are saying is the weakness of PFI, the higher costs, because we will pay for those in the long term. This is not some cheap alternative. We pay for it one way or another and we are creating long-term obligations and tying up public finances for a very long period.
Q558 Lord Best: It is the long period I am concentrating on and whether you think that the long-term nature of these contracts is overall beneficial or harmful. Perhaps if I could say on the perspective of UNISON on this, we have heard it said that once locked into that 30-year contract there is the advantage-and this would be an advantage to the workforce-that even if there were severe public expenditure constraints coming down the track that contract stands and that workforce remains there, whereas without it that might be something one would cut and that would be something that one would not survive.
Mr Watson: Our experience of that is somewhat different. Also before getting into the meat of it just to mention the point about freedom of information. There was a hospital in North East Wales-I will not mention the specific trust-where once the contracts had been issued for the cleaning the number of cleaners was then cut subsequently. It was only after a long battle that the contract for that was released, after appeals to the Information Commissioner, and the specifics of the contract were available. We looked at the contract and saw that it could not possibly be done with the reduction of cleaners that the contract was actually proposing. It was only when we went through a long battle to have proper openness around the contract that that protection of the workforce that you mentioned actually came into play. There have been a number of examples where it has been very difficult getting hold of information about contracts. A quarter of the appeals to the Information Commissioner take two to three years for a judgment to be passed on them. One of the key lessons that has come out of PFI for us is the fact that there needs to be more openness more quickly around these contracts. Talking about the length of the contracts, one of the main problems with those is the transaction costs because these are large, complex contracts. It has been estimated that transaction costs come in at around 8% of the total value. In £64 billion-worth of PFI contracts, around £5 billion would be accounted for by transaction costs. The complexity of the contracts as well, including the soft services and the support services within that, grows to an enormous size and again there are costs associated with that. These services, for example in hospitals- cleaning, catering, portering, the soft services associated with those-when they have been included as part of the PFI there has been no step change in the quality of delivery, there has been no particular innovation, and if they are retendered, then the retendering is done by a special purpose vehicle and is then outside of the public procurement regulations, so the public accountability of those is then lost. Besides which, there is the inflexible nature of these, if they are over a long period, and the lack of effective risk transfer, because the risk always remains in the public sector if the service fails and does not transfer to the private sector.
Dr Porter: If I could add to that very briefly. The way in which PFI is structured in the Health Service is that a local health economy is encouraged to take on the contract. If it is to build a hospital, it is the hospital trust that is effectively the major partner, but the PFI does not proceed unless the primary care trust (which is the main commissioner for that area) is also, I would not say party to it, but I have seen a number of problems where PCTs have evolved and changed over time and everybody has denied responsibility several years down the line. Effectively, the local health economy as a whole has to agree to take it on. There is then a thing called the unitary payment and the unitary payment is effectively the mortgage plus the service charge that runs for the lifetime of the contract and is the one that is involved in paying for the original build, the facilities, paying for the ongoing services and also incorporates the profit element for the providers of the original finance. However, that unitary payment, because it is all wrapped up as one, deliberately so as to make it easy to manage, in a sense, becomes a very dominating factor in the local healthcare economy. First off you cannot adjust it and it is effectively top-sliced off all health resources in that area. We have seen on a number of occasions that the operation of that unitary payment has so distorted the local health economy that it has caused near collapses of trusts, takeovers, it has caused strategic health authorities to have to indulge in cross-subsidies which are supposed to be reduced and eliminated in the Health Service. To think that that unitary payment is then going to continue unchanged for the next 30 to 35 years is enormously daunting to those people who are just trying to manage it on a day-to-day basis at the moment, because what we know about the next 30 years is that the unitary payment will continue, but what we have discovered since these things have been signed is that the tariff is to be frozen for four years, as announced by the Secretary of State a few days ago, and all sorts of things are going to change in the future about resource delivery. The outgoings remain top-sliced and unalterable and it is that inflexibility extending over decades that is going to cause damage in years to come.
Q559 Chairman: The counter-argument is that public sector buildings have a reputation for being chronically under-maintained over the years because whenever there is a squeeze on public expenditure you go for the short-term contracts, and maintenance contracts are the ones that suffer, whereas if you are in a PFI contract of this type, at least the maintenance continues.
Dr Porter: Absolutely true and I think anybody who has worked in hospitals is aware of a number of the older ones where maintenance has been let slide because of squeezes on resources. One of the areas that you might be interested in asking is what is good about PFI. There are some things which are good in the sense that maintenance cannot be forgotten, it is part of the contract, but it comes expensively and it comes inflexibly. Yes, anything can be bought but the price at which it is bought is too high, we would say. Ms Jaffe: Can I add something to that which is I agree that the whole-life approach of PFIs has been an advantage and, in a way, PFI is solving the problems we had in the 1960s and 1970s with the neglect of buildings and also tying the construction company into the maintenance so that the standards should be higher, but, in actual fact, on the whole-life cycle costs, what we heard so interestingly from the experts in the previous session is that they have learned the lessons of PFI. Procurement was an unusual thing done by a very small number of public sector people 20 years ago. Now it is central, for better or worse, to public services, and I think these lessons from PFI have been and are being integrated into traditional procurement, and if there is a lesson that you have to keep some money ring-fenced for maintenance then I think that is one that we can carry forward.
Q560 Lord Forsyth of Drumlean: I am struggling a bit here, Dr Porter. When I was a Health Minister- the scheme may have changed-your members who were general practitioners used to come to the Department in order to get support for them to build health centres and so on, which would be done on a long-term mortgage, and none of these arguments about how healthcare might change over the next 20 years was used in the way that you are using them now against private finance being brought into the construction of hospitals. Why are GPs' surgeries different to hospitals in that respect? Dr Porter: It is slightly difficult to answer. Obviously, if you will forgive me, that was a while ago and under a very different financial regime.