The private finance initiative (PFI) is a form of Public Private Partnership (PPP) introduced and used by UK governments since 1992. By April 2011, about 700 PFI contracts had been signed in the United Kingdom with an estimated capital value of almost £50 billion in England alone and annual repayments estimated at £8 billion.
PFI has been the dominant form of procurement for large national health service (NHS) projects. More than 90% of the £11.6 billion of capital expenditure contracted to take place under England's hospital-building programme has come through PFI. By April 2009, 101 of the 133 new hospitals built between 1997 and 2008, or under construction, were privately financed.1
The policy has been controversial since its inception because of the relatively high cost of private finance compared with government borrowing. Special subsidies and the sale of property have been used to counteract high borrowing costs but the policy has led to affordability problems and service closure from the beginning.
Affordability problems have arisen because individual hospitals have been made responsible for the cost of PFI borrowing but the high costs of debt repayment has not been fully funded by the hospital payment system. As a result, the NHS clinical care budget has had to be redirected from patient care to paying for capital. These payments involve a transfer of wealth from public services to banks and shareholders and equity investors. The problem has been exacerbated by the financial crash and several PFI and non PFI hospitals in England's NHS are now facing bankruptcy and closure.
PFI, despite its scale, remains largely unaccountable. The government has refused in most cases to open PFI contracts to public scrutiny on the ground that they are commercially confidential. The payments are ring fenced and creditors have first call on NHS funds, including funds from other NHS services and non PFI hospitals. The lack of scrutiny and openness with contracts means that project monitoring and evaluation has often been poor or non-existent and even official inquiries, such as those by the National Audit Office, have been hampered by lack of data or its complete absence. As a result, systematic evaluative data is often lacking and researchers have had to rely on case study evidence. Case studies prepared by the present authors and colleagues are listed in appendix 1.
In this briefing we identify the main problems of PFI in the health sector as the transfer of scarce resources out of the system to bankers and shareholders which has resulted in distortion of resource allocation due to affordability problems with meeting annual PFI charges. The PFI policy is driven by government prioritising off balance sheet accounting and seeking to justify the policy with biased value for money ('economic') appraisal, high financing costs, and false claims about benefits of private sector efficiency including misleading use of time and cost overrun data in the public sector.
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1 Department of Health (2008) 'List of new hospital schemes - Prioritised Capital Schemes - updated November 2008'. Available at: http://www.dh.gov.uk/en/Procurementandproposals/Publicprivatepartnership/Privatefinanceinitiative/Newhospitalschemes/index.htm?IdcService=GET_FILE &dID=176731&Rendition=Web. Accessed: 20 March 2009.