Counting the cost of PFI in the national health service

South London Healthcare has been told by the government that an administrator may be appointed to oversee its finances which are groaning under the weight of interest payments on PFI debts.

Ultimately, the trust could be broken up, with the closure of some services.

Mark Hellowell, an Edinburgh University economist who has advised the Treasury select committee on PFI, told Channel 4 News that although there were several trusts in financial difficulties, South London Healthcare was the most extreme example because it was paying a higher rate of interest on its PFI debts than any other NHS trust.

“In some ways it’s not a surprise we’ve got to this point,” he said. “I think that even in terms of PFI and its rather problematic track record, this is an egregious example.” South London Healthcare was saddled with an “uncommonly expensive” repayment schedule.

The Department of Health says the sustainability of seven NHS trusts is being threatened by the PFI deals they have negotiated: South London; Barking, Havering and Redbridge; St Helens and Knowsley; Peterborough and Stamford; North Cumbria; Dartford and Gravesham; Maidstone and Tunbridge Wells.

It says it will support them with £1.5bn of taxpayers’ money if certain tests are met. They have to demonstrate that their problems are exceptional and that they have a plan to manage their resources, as well as making savings and providing high-quality care.

What is PFI?

PFI began 20 years ago and has been used to build hospitals and schools. It was introduced by John Major’s Conservative government in 1992 and was expanded by Labour after 1997 as a way of getting the private sector to take on the financing, construction and operation of public sector infrastructure projects.

In return, firms lease back these schemes to the government, often on long-term leases.

Former Labour prime minister Gordon Brown has said that more than 100 new hospitals would not have been possible without PFI.

But in a report in May, MPs on the Commons public accounts committee said that in many cases investors had made “eye-wateringly high” profits, with taxpayers trapped in expensive and inflexible contracts for which they are ultimately liable.

Public sector bodies proposing to use PFI are supposed to demonstrate that doing so would be better value for money than other methods.

What has gone wrong?

But Mark Hellowell said: “I think there is pretty good evidence that PFI is more expensive. One obvious element of that higher cost is the interest rate you are paying on that investment and no offsetting savings because of the maintenance or service provision the private sector carries out.

“Some of the problems are related to PFI directly. Some are related to strategic misrepresentation. Hospital managers have made fairly heroic assumptions about how big a facility they can afford.

“Unfortunately what happens is that efficiency savings are quite difficult to achieve. A minority of trusts are unable to cope and are struggling to get patients through their doors.”

Mr Hellowell said trusts had opted for PFI because it had been presented as “the only game in town”, but these days it could not be disputed that it was cheaper for the government to borrow to build infrastructure than to use the private sector.

“From a value for money and affordability perspective this is the worst possible time to be signing off PFI projects.”

What does the government say?

The Department of Health says NHS PFI deals signed under the previous Labour government totalled £79bn, of which £5.9bn has been paid off.

It says poorly negotiated deals with the private sector have forced many trusts to spend extortionate sums on maintenance payments.

Examples, unearthed by Conservative party researchers, include County Durham and Darlington NHS Foundation Trust paying £525 to move three beds and North Cumbria University Hospital Trust charged £466 to have a light fitting replaced and £75 to install an air freshener.

The government says it inherited 102 PFI hospital building programmes when it came to power and that it has not approved any new schemes since then.

In November, Chancellor George Osborne announced a “fundamental reassessment” of PFI across government. But the government has continued to use it, with a PFI scheme to build 300 schools at a cost of around £2bn.

One of the strongest criticisms of PFI is that government liabilities are kept off balance sheet, that they are, in effect, hidden. To address this concern, the coalition government has announced that PFI liabilities will be published in its accounts.