The Private Finance Initiative (PFI) is a form of ‘partnership’ between the public and private sectors in which a group of private companies contracts to provide public facilities, often public buildings such as schools or hospitals. It was first introduced by the Conservatives in 1992, used much more extensively after Labour came to power in 1997, and is still in use now, if now in a slightly different form (PF2, and see also LIFT).
New public projects, such as new healthcare facilities, used to be financed by the government. However, since the introduction of the PFI, if part of the NHS needs capital investment – for example, if an NHS Trust needs to build a new hospital – a contract is drawn up between the Trust and a consortium of bankers, builders and service contractors following a competitive tender. The consortium, known as a Special Purpose Vehicle (SPV), then raises the necessary finances by borrowing and issuing shares.
The SPV is contracted not just to finance the project but also to design, build and then maintain the fabric of the hospital over the length of the contract. In addition, it usually provides many of the supporting or ‘soft’ facilities associated with the hospital, such as catering and cleaning. The Trust makes a regular repayment (a ‘unitary charge’) to the SPV which covers the provision of the building, any equipment included in the contract, and soft facilities.
The PFI has been favoured by governments partly because it avoids the outlay of large one-off payments of public money and does not show up in government accounts as increased public borrowing (PF2 is different to this).
Critics of these private finance schemes point out that they are really a form of hire-purchase that proves much more expensive than other ways of financing new projects, such as borrowing money from the government (possibly twice as much). This is partly because of the very high interest rates charged on the original loan, but also because the charges for ‘soft’ facilities (such as cleaning or portering) are often considerably more expensive than if they were provided in-house or out-sourced independently. In addition, PFI contracts generally demand that repayments are index-linked, so they increase by a minimum of 2.5% each year.
In 2017 there were around 700 PFI schemes in Britain, with an estimated capital value of about £59 bn but which cost taxpayers over £308 bn.
In the context of the NHS, the contract between a SPV and an NHS Trust can be for as long as 60 or even 100 years. The difference between the original cost of a building and what the Trust will have paid by the end of the contract is usually massive: there are instances where some NHS Trusts are paying almost 12 times the initial sum borrowed. It means that while investors in PFI schemes make extraordinary profits –sometimes as much as 40 to 70% in annual returns – the NHS Trusts involved have less money available in their operational budget for equipment, staffing and patient care and are therefore cutting services. Increasingly, Trusts with PFI contracts are going into financial deficit.
Take, for example, Bart’s Health, the biggest NHS Trust in England, which entered into a 35 year PFI contract for the provision of new medical facilities at two of its sites. The new buildings came into service in 2012. The cost of providing the facilities was £1.15 billion but with the cost of inflation-linked repayments rising every year, the total cost to the Trust will be £7 billion by the end of the contract. In 2015 alone, repayments will amount to £143.6 million, with the Trust running a budget deficit of over £90 million. In the same year, the Trust received one of the worst inspection reports ever issued by the Care Quality Commission (CQC). The CQC, which had previously placed the Trust in to Special Measures, rated services at Barts Health as ‘Inadequate’: concerns included poor patient safety, a high rate of cancelled operations, and high levels of stress and low morale amongst staff.
One of the original justifications for the high costs associated with PFI was that the risks associated with PFI projects (such as buildings not being finished on time, or poor building design leading to longstanding problems with maintenance) were borne by the private rather than the public sector. But the main risk is associated with the construction phase of the project which may last for about five years: the years following 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. A number of PFI hospitals are known to have major structural defects, including the Royal Liverpool Hospital where the failed company Carillion used combustable cladding. (The Royal Liverpool Hospital, and the Birmingham Midlands Hospital have both been brought back into public ownership following the collapse of Carillion. The company’s business model was described by a parliamentary report as “a relentless dash for cash“.)
There is strong feeling that Whitehall has turned a blind eye to the fact that PFI does not represent value for money for the tax payer. The Public Accounts Committee chaired by Margaret Hodge MP in 2011 was highly critical that the Treasury assumed PFI contractors were paying tax, when many of them were based in off-shore tax havens.
The public purse is also loosing out in another way: those NHS Trusts without a PFI contract have to pay a capital charge to the Treasury for the use of land, buildings and equipment and to cover depreciation of assets. But with PFI, the assets of the hospital (including its land) usually transfer to the PFI consortium for the duration of the contract, and the money that would have gone to the Treasury (the capital charge) goes instead to the PFI consortium as part of the Trust’s debt repayment.
On top of this, there is an argument that, in some cases at least, PFI financing is responsible for ‘illegitimate debt’ – this term refers to debt that has been set up, for example,
- by fraudulent means,
- without transparency,
- on the basis of grossly disadvantageous terms (such as excessive rates of interest), or
- for non-viable projects.
For example, early PFI contracts were set up in breach of what were known as the ‘Ryrie Rules’ (later abolished) which required that, to be legal, private financing for public projects (such as new hospitals) had to be a cheaper option than public borrowing.
Although some PFI deals might be responsible for creating illegal debt, the only attempt that we are aware of to challenge the use of PFI on legal grounds has been unsuccessful.
Over time, there has been growing recognition of the serious problems associated with PFI. The system for setting up or procuring PFI projects was seen to be slow and expensive, which, together with the staggering profits enjoyed by investors, made PFI schemes unnecessarily costly and poor value for money for the taxpayer. As a result of growing criticisms, plus the need to stimulate the construction industry, the government introduced a new version of the initiative, known as PF2. The idea behind this was to draw new investors into the market by further limiting the financial risk, passing this instead to the public sector. Among other differences to PFI, the government takes 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.
Despite these changes, 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 even more likely than PFI to create unsustainable costs for NHS Trusts, and even greater profits for investors. 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%. The report concludes that the use of PF2, alongside the current government’s commitment to marketisation and private sector involvement in the NHS, is undermining the financial sustainability of local health services and their ability to meet people’s health needs. (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.)
PFI and privatisation
PFI deals have financed £11.8 billion of hospital building across England. Over 31 years, these deals will cost the NHS £79 billion in repayments. The extent to which PFI drains money from the NHS into private companies means, in effect, the very fabric of NHS hospitals is being privatised.
There are fears that this process of privatisation will continue with the ‘new models of care‘ that NHS England wants to see incorporated in Sustainability and Transformation Plans (STPs). These models of care are central to a restructuring of the NHS, for example bringing together hospital and out-of-hospital services, and integrating NHS and social care. Although plans will vary from region to region, it seems inevitable that, in many instances, the new structures will require purpose built premises. With no sign that funding for such capital projects is to be made available by the Treasury, the assumption appears to be that finance will come from the private sector.
How to end PFI?
Finding a way to end PFI is difficult: each potential solution seems fraught with problems. For example, some people argue that PFI debts should be removed from hospital trusts and taken on by the Treasury. However, this will do little to address the fundamental problems associated with PFI contracts, such as the excessive profits that have been and could continue to be extracted from the public purse by private investors.
In addition, removing PFI debt from NHS Trusts will put hospitals at immediate risk of privatisation and sale: with PFI contracts, the new building and, significantly, the land it stands on (often a prime site for development) are owned by the PFI consortium until the end of the contract when the full debt (with interest) has been paid off. Some suggest that this potential sale of PFI-financed hospitals has been the plan all along, and is only prevented while the hospitals are still responsible for massive debt.
One solution put forward to protect PFI-built hospitals from privatisation, at least in the short term, is for a renegotiation of PFI contracts, so that the terms are fairer, and then for the Treasury to make PFI repayments to the investors on behalf of the hospitals. How open the members of PFI consortia would be to renegotiation is a moot point. There are also calls for a windfall tax on PFI company profits although, because of the way PFIs are set up (with most profits being shifted offshore), it’s likely that only about 10% of profits would be taxable.
Recent analysis has suggested a sounder and relatively low cost alternative of nationalising the SPVs that operate Special Purpose Vehicles, and initially renegotiating service contracts so that public authorities contract directly with service providers, and not through SPVs. And once contracts come to an end, provision is brought back ‘in-house’. This approach is gaining support, including from the Labour Party.
For a discussion of the pros and cons of different ways of ending PFIs, see
A. Pollock (2012) How PFI is crippling the NHS. http://www.guardian.co.uk/commentisfree/2012/jun/29/pfi-crippling-nhs
House of Commons Treasury Committee (2011) Private Finance Initiative Seventeenth Report of Session 2010–12 Volume I: Report, together with formal minutes, oral and written evidence. www.publications.parliament.uk/pa/cm201012/cmtreasy/1146/1146.pdf
Red Pepper (2014) An Angry Person’s Guide to Finance: Making sense of the complex and frustrating financial world (written by Jack Copley) http://www.redpepper.org.uk/wp-content/uploads/apgf-web.pdf