22 Sep 2011

PFI: unaffordable or ‘the only game in town’?

Are Private Finance Initiative (PFI) schemes worth the money? An expert picks apart the complex funding model for building schools, hospitals and more, for Channel 4 News.

PFI: unaffordable or 'the only game in town'? (Getty)

Health Secretary Andrew Lansley says some PFI deals have left NHS trusts on the brink of collapse.

He claims that the deals – in which private companies build, and sometimes maintain, large infrastructure projects like hospitals, in return for an annual fee – are crippling trusts.

Under PFI deals, facilities are built by private contractors, who then own the structure for up to 35 years. The public sector body, such as the NHS or the MoD, pays the contractors annual interest, as well as paying off the capital sum and maintenance.

But how do these complex financial instruments work, and are the Health Secretary’s claims fair? Channel 4 News consulted PFI expert Mark Hellowell, from the University of Edinburgh.

Q: If PFI schemes are so bad, why does the government use them?

A: From the point of view of the Department of Health, PFI allowed investment to take place above what their formal budgets allowed. It’s like a credit card – allows you to consume more now than your resources enable you.

For NHS trusts, for large capital schemes, like building hospitals, PFI was and is the only game in town. And for the Treasury, PFI enabled and enables borrowing to take place which is not on the standard fiscal statistics.

Read more: Coalition increases discredited PFI schemes

Q: Why do PFI schemes cost more than the value of the asset?

A: The cost of the scheme is always higher than the cost of the asset. It’s like a mortgage – your mortgage payments are higher than what you initially borrowed. That’s how interest rates work.

Interest rates on PFI are higher than if you borrow directly on the bond markets. At the moment, the government can borrow long term for less than 4 per cent where PFI has a weighted average interest rate of 8.5 per cent.

This is not so problematic if NHS funding rises in line with the cost of care – but it doesn’t, it is much more linked to RPI inflation.

PFI and the NHS (Getty)

Q: Did the government do bad deals? And are they still happening?

A: The Labour government didn’t negotiate the deals, NHS trusts did and still do. The fundamental point is that this is an existing, ongoing programme.

If you are an NHS trust then PFI is the only game in town – that continues and in the Department of Health that’s similar. This is not the same for the Treasury – that can borrow, and the select committee in July said it should consider borrowing rather than PFI. But the Treasury is a political organisation and its interest is in deficit reduction and PFI helps with that.

Q: Who invented PFI?

A: Specifically in relation to the NHS, no NHS PFI projects were signed off under John Major’s government, but they did initiate a number – the procurement just wasn’t done.

Labour embraced and expanded this and the new government has embraced and expanded it also. It’s not just legacy deals – there’s an entirely new programme. Michael Gove has £2bn of PFI projects that were not there under Labour.

PFI is not party political. It has been spun very successfully but it is completely misleading and mendacious.

Q: How can PFI pressures on NHS trusts be solved?

A: NHS trusts receive income for providing treatments based on the average cost of the treatment. If your costs are higher than the average cost base, the amount of money you get for patient care is less. And this constrains the quality of care you can provide.

It is not the case that PFI requirements are constraining the quality of hospital services. Very few trusts would have opted to use PFI but it was the only option to build hospitals.

All that needs to happen – and there is some indication that Andrew Lansley is sensitive to this – is that trusts which have higher capital costs as a result of PFI do not bear the costs alone.

Q: Are PFI schemes linked to hospital closures?

A: There is a big political story about to happen – David Cameron is going to renege on pledges pre-election to not close hospitals or services, for example at Barnet. I suspect PFI is a convenient way for the government to explain away these changes.

Some changes are necessary to rationalise hospital care, but the PFI pressure on NHS trusts could be resolved. The cost burden of PFI should be supported generally, by government. Then they can make rational decisions on closure based on care requirements.