1. The Private Finance Initiative was first introduced in the UK in 1992 across a range of public services, such as schools, hospitals, roads, transport and defence.v
2. The traditional way of building hospitals is for the government (or a public body) to borrow money, usually via the Public Works Loan Board, and to contract with a construction company to build the hospital. The public body then takes over the running of the hospital.
3. With a PFI contract, a public body such as an NHS hospital trust contracts with a private company set up for the purpose known as a Special Purpose Vehicle (SPV). This company borrows money, contracts with a construction company to build the hospital and then usually contracts with another company to provide all the ancillary services needed by the hospital, such as cleaning, catering, portering and building maintenance, but not clinical services.
4. The NHS makes annual payments to the PFI company over the course of a period which is sometimes as long as 40 years, with an average of 31 years for the current 125 health PFI projects. These annual payments, known as a 'unitary charge', are allocated by the PFI company to cover the cost of building the hospital, the cost of running the hospital and providing ancillary services, the maintenance of the building, the interest repayments on the loans, the profit made from the contract by the PFI company, and any tax the PFI company pays on these profits.
5. The NHS Trust only starts paying for the hospital once it is built and can be used to treat patients - in effect it is paying the private company for the use of the hospital for the duration of the contract, similar to a rental agreement.
6. According to the Treasury's database there are currently 125 PFI contracts with private companies overseen by the Department of Health, and the value of the assets which have been built is £12.4bn. Over the course of the life of these contracts, the NHS will pay in the region of £80.8bn to the PFI companies concerned.3 vi
7. Private Finance Initiative contracts have been criticised for a number of reasons. The first is that using the Private Finance Initiative is much more expensive than the traditional method using public borrowing. Typically a PFI deal will raise 90% of the money to build a hospital in loans from banks and other financial institutions and 10% in the form of shares or equity owned by private companies.4
8. Both the banks and the shareholders expect a significant return on their investment. But research has demonstrated that the returns expected by those investing in and lending to PFI projects are far higher than they would get if they invested elsewhere.5 In 2011 the Treasury Committee found that the cost of financing a PFI scheme through loans and equity stakes was double the cost of government borrowing.vii
9. It has also been argued, second, that these high rewards are not justified, as once building has finished PFI projects are not risky investments - the government guarantees that the taxpayer will always make the payments to the PFI company unless the hospital is not available for use or the service falls below the standard set out in the contract, in which case a penalty can be issued.
10. However the National Audit Office has found that such penalties are rarely issued.6 Even when a penalty is levied, it is the maintenance or other contractor carrying out the work who is fined; the PFI company is generally financially unaffected. As a result the income and profits of PFI companies are almost fully guaranteed for the duration of the contract, a point which is reiterated yearly in many PFI companies' financial accounts.viii
11. A third concern about PFI relates to the impact these high costs have on the NHS Trust which has contracted with the PFI company. For a hospital trust such as Barts Health NHS Trust in London the costs of paying the £145m a year for its two PFI schemes have become unsustainable; in the last financial year the government has had to loan the Trust £115m to enable it to keep making its revenue payments.7 Because the Trust is legally obliged to make the payments to the PFI company it must prioritise these payments before all other commitments.
12. The aim of this report is to:
• determine the total amount of pre- and post-tax profit which has been generated by the Department of Health's PFI deals over the course of the last 6 years for which data are available (2010 - 2015),
• examine how much of the NHS funding for PFI projects has gone out of the health service in the form of pre-tax and post-tax profit,
• identify schemes where the rate of profit is particularly high,
• and examine the implications of PFI profits for NHS finances.
13. It concludes with recommendations on how to address the impact of PFI on the NHS. A note on the methodology used is set out in Annex 1.
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v One of the very first PFI schemes to open was the Skye Bridge in 1995 which was first commissioned in 1992
vi The Treasury figure is nominal, not discounted, and will include the cost of services provided as well as repayments of borrowings to fund construction.
vii In 2011 the Treasury Committee found that "The cost of capital for a typical PFI project is currently over 8%-double the long term government gilt rate of approximately 4%" (House of Commons Treasury Committee Private Finance Initiative Seventeenth Report of Session 2010-12 https://www.publications.parliament.uk/pa/cm201012/cmselect/cmtreasy/1146/1146.pdf)
viii Services provided by the companies involved in PFI contracts are to different extents negotiable over the contract period. A review of the costs of services provided will often happen every 5-7 years but concerns have been raised over how rigorous and effective these reviews are.