The Private Finance Initiative (PFI) is a method of providing funds for new public infrastructure, like a new hospital, where private companies are contracted to arrange the funding, as well as building and managing the project.
New hospital building projects used to be financed by the government but, increasingly, since the 1990s NHS Trusts have been encouraged to turn to private finance when they need capital investment. Under PFI, this means that a consortium of bankers, builders and service contractors raises the necessary finances for a project on the government’s behalf by issuing shares and by borrowing. The consortium is contracted to design, build and maintain a hospital and, in addition, usually provides the supporting or ‘soft’ facilities, such as catering and cleaning, for as long as 60 to even 100 years.
The payments that NHS Trusts make to such consortia are much more expensive than if they had borrowed the money from the government (sometimes twice as much), partly because of very high interest rates. In addition, PFI contracts demand that payments are index-linked, so they increase by a minimum of 2.5% each year. This means that there is a huge difference between the original cost of a building and what the Trust will have paid by the end of the contract: there are instances where some NHS Trusts are paying almost 12 times the initial sum borrowed. In addition, the charges for ‘soft’ facilities such as cleaning are often more expensive than those negotiated by hospitals without PFI contracts.
One of the original justifications for these high costs was that the risks associated with PFI projects – such as buildings not being finished on time, or poor design leading to longstanding problems for use or maintenance – were borne by the private rather than the public sector. But the primary risk is associated with the construction phase of the project – the many years of a PFI contract after the construction phase are relatively risk free but remain excessively expensive.
PFI has also been justified on the grounds that the private sector is more efficient than the public sector at running these large building programmes. This is not borne out by evidence: for instance, in 2011, according to the House of Commons Treasury Committee, 31% of PFIs were delivered late and 35% ran over budget (p.25). The quality of buildings was often poor in order to maintain sufficient levels of profitability. This was particularly the case for NHS projects.
Successive governments have favoured the PFI because it avoided the outlay of large, one-off and up-front payments and did not show up in government accounts as increased public borrowing. However, over time, serious problems began to be recognised. The system for setting up or procuring PFI projects was slow and expensive which, together with the staggering profits enjoyed by investors, made PFI schemes unnecessarily costly and poor value for money for taxpayer.
As a result of growing criticisms, plus the need to stimulate the construction industry, the government introduced a new version of the finance initiative, known as PF2. The idea behind this is to draw new investors into the market by further limiting the financial risk, passing this instead to the public sector. Other differences to PFI include the government taking a minority share in a PF2 project (no less than 25% and up to 49%). Instead of individual NHS Trusts commissioning a PF2 project, this will be carried out by a centralised procurement unit, with standardised contracts. The supply of services such as cleaning or maintenance will not be tied into the PF2 contract. Instead, procuring these services will be carried out by the public sector.
A new report by independent think tank Centre for Health and Public Interest warns that PF2 projects are unlikely to address concerns that private finance initiatives are unaffordable. Instead, PF2 is likely to create even more debt for NHS Trusts, and even greater profits for investors, than PFI. This is because PF2 reduces the amount of funding to be raised through debt (previously about 90%, now 75-80%), and increases the amount of equity (a riskier and so more expensive way of raising finance) to be provided by the owners of the PFI consortium (previously about 10% and now 20-25%). If market rates for equity and debt remain at current levels, the new structure for funding PF2 projects is estimated to increase the rate of return to private investors by about 15%. (see http://chpi.org.uk/wp-content/uploads/2014/11/CHPI-PFI-Return-Nov14-2.pdf)
There is also public-private partnership initiative called LIFT that has specifically been used in the community to provide NHS community-based facilities such as GP surgeries.
The problems of PFI and PF2
In the context of the NHS, the responsibility for repaying PFI and PF2 debt, plus the extortionate charges for interest on the debt (and, in the case of PFI, for facilities) rests with individual NHS Trusts. To take the example of Barts Health NHS Trust in London, the Trust is now over £93 million in debt, largely due to a 43 year PFI contract under which it will eventually repay more than £7bn for buildings and services estimated to be worth £1.1 billion. The Norfolk and Norwich Hospital will be paying back 14.7 times the cost of the original PFI investment.
These sorts of costs , which may represent as much as 16 to 20% of a hospital Trust’s revenue, have to be paid out of their annual operating budget – the budget that also has to pay for staff wages and patient care. This is one of the main reasons why the NHS has funding problems and why so many Trusts have had to introduce cuts (such as reductions in bed numbers, staff salaries or staff numbers) or build smaller hospitals regardless of local health needs.
PFI shifts the focus of planners and managers away from considering the health needs of the public and towards responding to the needs of private capital and the needs of NHS Trusts as corporations. It is also one of the reasons why dozens of hospital Trusts struggling with PFI debts are at risk of closure.
Total NHS PFI schemes are currently estimated to have a capital value of £11.6 billion, on which the total repayments will be almost £80 billion. Of these schemes, about 70 are thought to be owned by offshore companies that are not paying tax on their profits to UK Revenue and Customs.
The crippling cost of PFI debt is one of the main reasons why the NHS is struggling financially. However, extricating NHS Trusts from their PFI contracts is a highly complex process, and one that PFI investors will be reluctant to assist with (see also the potential problems raised by the Transatlantic Trade and Investment Partnership.) In contrast to the extensive cuts we are seeing in public spending, less than 1% has been trimmed from the total cost of PFIs in the UK since 2012. There are however a growing number of campaigns aiming to put pressure on the government to find a viable solution to PFI that does not endanger the financial viability of NHS Trusts while bringing an end to private investors profiteering from the NHS.
What you can do
For more detailed information about the use of private finance initiatives in the NHS; an overview of the solutions put forward for ending PFI debt; and actions you can take, such as how to find out who profits from your local NHS PFI, see the website of a new campaign called Drop the NHS Debt – http://www.dropnhsdebt.org.uk.
See also The People vs PFI, a campaign representing grassroots organisations, local campaigning groups and the patients, students and residents who have been affected by PFI – http://www.peoplevspfi.org.uk/#/
Centre for Health and Public Interest (2014) The return of PFI- will the NHS pay a higher price for new hospitals? (author Mark Hellowell) http://chpi.org.uk/wp-content/uploads/2014/11/CHPI-PFI-Return-Nov14-2.pdf
Huitson O, 2011 Private Finance Initiative: the scandal that refuses to break. http://www.opendemocracy.net/ourkingdom/oliver-huitson/private-finance-initiative-scandal-that-refuses-to-break
NHS For Sale. The great PFI swindle. http://www.nhsforsale.info/privatisation-list/surgery/the-great-pfi-swindle.html
Pollock A, Price D (2013) PFI and the National Health Service in England. http://www.allysonpollock.com/wp-content/uploads/2013/09/AP_2013_Pollock_PFILewisham.pdf
Pollock A, 2004 NHS plc: The privatisation of our health care. London: Verso.
Whitfield D (2014) Fingers in the PFI. http://www.redpepper.org.uk/fingers-in-the-pfi/
To see a lively discussion about the use of PFI in general, including for the NHS, see The Keiser Report: Private finance or public swindle? https://www.youtube.com/watch?v=FpvuVlMrM4o