Magazine article Public Finance

Poor Prognosis for the PFI?

Magazine article Public Finance

Poor Prognosis for the PFI?

Article excerpt

The government's apparent U-turn over the Private Finance Initiative in the NHS, reversing years of unstinting support, has stunned many people. The most public expression of the new attitude was Health secretary Patricia Hewitt's decision in December to review the affordability of the £1.2bn scheme for the Royal London and St Bartholomews hospitals. Commercial terms had already been agreed with partner Skanska, and the trust stands in good financial health. At the time of writing, the future of the Baits redevelopment still hangs in the balance, although the trust might have to make substantial payments if the scheme fails to go ahead.

So what has changed? The PFI has had its critics since its inception in the John Major years. Sceptics then viewed it as convenient accounting smoke and mirrors to reduce public spending and satisfy the European Union's convergence' criteria for monetary union. The political Left has consistently opposed it as a route to the privatisation of public services; few claim to understand it fully, few love it. The late journalist Paul Foot famously described it as an enormous transfer of power in Britain from public, elected authorities to private, unelected corporations'.

Now, over a decade later, it seems that both the Treasury and the accounting profession are also having serious doubts. The National Audit Office report on the refinancing of the Norfolk & Norwich University Hospital, published in June 2005, rang alarm bells when it identified windfall profits of £73m made by banks and property developers, and along the way highlighted the growing secondary market in PFI hospital shares.

And now the Department of Healths recently issued NHS operating framework for 2006/07 - while affirming that 'the NHS will remain the largest single user of PFI in government, with a programme valued at an estimated £7bn-£9bn - makes it clear that business cases for PFI schemes must now be assessed in the light of the reform programme' and that boards must consider longer-term affordability carefully'. As Mark Hellowell observed in Public Finance last week, this represents a cut in planned PFI spending of up to 40%.

If the rhetoric surrounding the PFI has often focused on building works and private sector project management skills, the economic substance has lain in a transfer of hospital support functions to the private sector. But with the English NHS now increasingly working on a market model, and with a viable and growing private hospital sector providing some 10% of NHS-funded elective surgery, the Treasury appears to be no longer willing to support the long-term costs of the PFI approach.

The accounting profession has also caught the new mood. Some trace the Department of Health's new realism to a starkly worded public interest report on the Queen Elizabeth Hospital NHS Trust in Woolwich, southeast London, issued in December by its auditors, PricewaterhouseCoopers. The trust moved to its current location in 2001 as part of an innovative large PFI scheme. Its deficit, projected at £19.7m in 2005/06, had already received considerable local publicity. Instead of blaming board members and urging the trust to tighten its corporate belt, PwC found 'underlying relative efficiency' at Woolwich, and observed that it was the high level of fixed costs arising from the trust s PFI scheme that made reducing costs 'particularly difficult'.

PwC then made two crucial points, which together have possibly pricked the PFI bubble. The first is the initiative's inflexibility within an NHS market that now demands the precise opposite. The fixed amount payable to the PFI partner 'is approximately £15m per year, increasing annually with inflation', the report notes. 'This amount is fixed under the contract and cannot be reduced, even if activity levels fall significantly.' Yet the Queen Elizabeth Hospital, like other suburban general hospitals and especially those around London, is increasingly vulnerable to competition and choice within the emerging NHS market, including competition from two nearby PFI-funded hospitals in Dartford and Bromley. …

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