J. Shaoul

Private finance and “value for money” in NHS hospitals: a policy in search of a rationale?

Allyson Pollock and her colleagues have long argued that using the private finance initiative to build NHS hospitals is an expensive way of building new capacity that constrains services and limits future options. Here they provide evidence that the justification for using private finance—that it offers value for money through lowering costs over the life of the project and by removing risk from NHS trusts—is a sleight of hand Since 1992 the British government has favoured paying for capital works in the public service through the private finance initiative (PFI)—that is, through loans raised by the private sector. For hospitals this means that a private sector consortium designs, builds, finances, and operates the hospital. In return the NHS trust pays an annual fee to cover both the capital cost, including the cost of borrowing, and maintenance of the hospital and any non-clinical services provided over the 25-35 year life of the contract. The policy has been controversial because of its high cost and impact on clinical budgets.1 2 3 4 5 6 When first introduced in 1992 proponents claimed that PFI would lead to more investment without increasing the public sector borrowing requirement. However, the UK budget surpluses of recent years (£23bn for 2000-1 alone) have been much greater than the total of £14bn private investment deals signed in 1997-2001. The present generation of taxpayers could have funded considerably more capital investment out of existing revenue instead of displacing the cost on to future generations. 7 8 Furthermore, there is no evidence that PFI has increased overall levels of service. On the contrary, its use in the NHS has had two main effects. Firstly, it has displaced the burden of debt from central government to NHS trusts and with it the responsibility for managing spending controls and planning services, …

Partnerships: for better, for worse?

Partnerships are the British government’s preferred method of procuring public sector services, and the policy is usually justified in terms of delivering value for money. Ex ante financial methodologies are prescribed to ensure that decision making is based on a sound appraisal of alternatives and the government has called for an evaluation of implemented projects. This paper seeks to contribute to that evaluative process by exploring ex post facto some of the issues and problems that arose in practice. Using a case study approach, the paper considers two failures of information technology partnerships to examine how risk transfer, which is at the heart of the partnership policy, works in practice. The cases show that the contracts failed to transfer risk in the way that had been expected. The public agencies, not the commercial partner, bore the management risk and costs fell on the public at large and/or other public agencies.

How the World Trade Organisation is shaping domestic policies in health care

High up on the agenda of the World Trade Organisation (WTO) is the privatisation of education, health, welfare, social housing and transport. The WTOs aim is to extend the free market in the provision of traditional public services. Governments in Europe and the US link the expansion of trade in public services to economic success, and with the backing of powerful medico-pharmaceutical, insurance, and service corporations, the race is on to capture the share of gross domestic product that governments currently spend on public services. They will open domestic European services and domestic markets to global competition by government procurement agreements, dispute-settlement procedures, and the investment rules of global financial institutions. The UK has already set up the necessary mechanisms: the introduction of private-sector accounting rules to public services; the funding of public-sector investment via private-public partnerships or the private finance initiative; and the change to capitation funding streams, which allows the substitution of private for public funds and services. We explain the implications of these changes for European public-health-care systems and the threat they pose to universal coverage, solidarity through risk-pooling, equity, comprehensive care, and democratic accountability.

Appraising and Evaluating PFI for NHS Hospitals

This paper explores the use of appraisal in the development of proposals to use private finance to provide acute hospitals under the Private Finance Initiative (PFI). It addresses the extent to which value for money (VFM) and affordability (which must be satisfied to enable a scheme to be approved) are demonstrated in the documents prepared by hospital Trusts. It identifies a number of issues (such as the transfer of risk and the development of public sector comparators) that pose new problems for investment appraisal, which are specific to its application to PFI.

The private finance initiative: PFI in the NHS--is there an economic case?

The private finance initiative substantially increases the cost of hospital building. Total costs (construction costs plus financing costs) in a sample of hospitals built under the private finance initiative are 18-60% higher than construction costs alone (table 1). Shareholders in private finance initiative schemes can expect real returns of 15-25% a year.1 The consortiums involved in these schemes charge the NHS fees equivalent to 11.2-18.5% of construction costs (table 2). If the Treasury were to finance new hospitals directly out of its own borrowing it would pay a real rate of annual interest of 3.0-3.5%. It has been estimated that the £2.7 billion Scottish private finance initiative programme will cost, at a conservative estimate, “£2 billion more than if the Treasury had acquired the assets directly.”2 The higher costs will be met locally through cuts in clinical spending and nationally through subsidies from NHS capital budgets. Medical staff are deeply implicated in hospital private finance initiative schemes. Clinical directors approve and medical directors sign off the full business case, clinical posts are lost, and heroic targets are set for gains in medical productivity. Clinical concerns are generally met by assurances that the largely undisclosed price of the private finance initiative is well worth paying because schemes approved by the initiative offer better value for money than public procurement. This claim is based on the fact that, for approval purposes, all privately financed schemes are compared with a notional publicly funded equivalent, the public sector comparator. However, this comparison is carried out using an appraisal methodology under which the cash payments associated with each option are “discounted,” and costs are adjusted to reflect “risk transfer.” Both these factors have an influence on the results of the comparison. The appraisal methodology is prescribed in government guidance and plays a crucial …

Highway robbery? A financial analysis of Design, Build, Finance and Operate (DBFO) in UK Roads

Abstract The ex‐post facto cost of using private finance in roads is examined using a case study approach. The paper focuses on the first eight design, build, finance and operate (DBFO) roads commissioned by the UK Government’s Highways Agency and paid for through a system of shadow tolls. It carries out a financial analysis of the publicly available accounting information from the Highways Agency and its private sector partners for the first 6 years since the start of the 30‐year schemes in 1997. Publicly available financial information about the schemes was found to be limited and opaque. In 3 years, the Highways Agency had paid more than the construction cost. It was unclear whether the payments were higher than expected at financial close. Its private sector partners reported a post‐tax return on capital of 29% and an effective cost of capital of 11% in 2002, twice the cost of public finance. However, operating through a complex web of subcontracting creates additional, undisclosed sources of profit for their parent companies that make it difficult to establish the total cost of using private finance. The paper questions the wisdom of using private finance by providing evidence about the cost, including the cost of risk transfer.

The private finance initiative: planning the "new" NHS: downsizing for the 21st century.

This is the third of four articles on Britains public-private partnership in health care Growing numbers of health authorities and NHS trusts are carrying out service “reconfigurations” which involve the centralisation of services from two or more sites and the sale or downgrading of the other sites Where structural change requires major investment, the private finance initiative is the only method of financing it. However, the higher cost of the private finance initiative increases the cost pressures on the revenue budgets.1 The result is service contraction: on average, bed numbers are to be reduced by 31% over the next three to five years (table 1). It should be noted that, at a national level, there has been no reduction in acute beds since 1994-5 (figure).2 View this table: Table 1. Changes in bed numbers at NHS trusts under private finance initiative development. Values are average numbers of beds available daily (all specialties) The relationship between new investment and service configuration raises questions about the planning process: who is making decisions on future services, and on what basis?3 When faced with questions about the relative importance of clinical and financial factors in service planning, the government has tended to argue that the crucial decisions are all made by clinicians Clinical directors are responsible for agreeing and medical directors for approving full business cases; however, healthcare planning has never been a core clinical competence, and making decisions is very different from agreeing to decisions taken by others This issue was raised earlier this year in correspondence in the Glasgow Herald , in which the Scottish health minister responded to criticism of bed numbers at the controversial Royal Infirmary of Edinburgh private finance initiative scheme by stating, “It is the clinicians who decide on the number of beds…. The assumptions on bed numbers were developed …

The power of accounting: reflecting on water privatization?

The water industry was one of a number of publicly owned enterprises and assets which were privatized during the 1980s in the UK. The Government justified its privatization programme on a number of grounds. In particular, it claimed that privatization would improve industrial performance by subjecting the nationalized industries to the discipline of the market, and so would yield benefits, via greater efficiency, to the industry, customers and the nation. Examines first the extent to which an accounting model and the financial numbers in the annual reports and accounts can be used to substantiate Government claims, and describe and explain the outcomes. Assesses whether accounting can assume a constructive and emancipatory role, by challenging existing problem diagnosis ‐ public sector inefficiency ‐ and posing alternative questions and solutions. Shows that the financial evidence does not substantiate the Government’s claims. Finds that greater efficiency, meaning lower costs relative to output, did not occur. Significant increases in efficiency had occurred prior to privatization, leaving little room to improve efficiency without jeopardizing levels of service and future service provision. The distribution of the surplus, which is publicly seen as a conflict between consumers and shareholders, is in fact much wider than this. Argues that the surplus has been so distributed that it has not only substantially benefited the shareholders at the expense of other stakeholders, but also has created the conditions whereby the other stakeholders will be disadvantaged in the future. Concludes that the real beneficiaries were largely invisible in the Government’s case for privatization.

The politics of the private finance initiative and the new NHS

This is the last of four articles on Britains public-private partnership in health care We began this series by arguing that the private finance initiative, far from being a new source of funding for NHS infrastructure, is a financing mechanism that greatly increases the cost to the taxpayer of NHS capital development.1 The second paper showed that the justification for the higher costs of the private finance initiative—the transfer of risk to the private sector—was not borne out by the evidence.2 The third paper showed the impact of these higher costs at local level on the revenue budgets of NHS trusts and health authorities, is to distort planning decisions and to reduce planned staffing and service levels.3 All this raises questions about the direction of government policy on the NHS. Recent government commitments to increase clinical staffing levels and reverse the decline in bed capacity sit uneasily with a policy that seems to lead in the opposite direction. The government has consistently argued that the private finance initiative is no more than a procurement policy, with no implications for services other than increased efficiency. However, this ignores the importance of public-private partnerships to the governments overall agenda. #### Summary points The private finance initiative does not provide new money for public services as the government claims The high costs of capital under the private finance initiative translates into service and workforce cuts The reduction in public provision of long term care, NHS dentistry, optical services, and elective surgical care shows the trajectory for the NHS under the private finance initiative In the NHS, shrinkage in service provision combined with budget constraints could force primary care trusts to redefine entitlement to NHS care and to seek privately funded solutions for those who can afford to pay, leaving a rump service The …

A Financial Appraisal of the London Underground Public-Private Partnership

This article examines whether the Government’s policy of Public-Private Partnerships (PPP) in the context of London Underground is likely to satisfy the financial criteria for approving a partnership proposal: value for money (VFM), including risk transfer, and affordability. After analysing the implications of the Underground’s cost structure for the PPP, the author looks at the methodology for appraising the PPP. She concludes that the methodology cannot be relied upon to provide a sound decision-making tool for London Underground. She demonstrates that the London Underground project is not affordable, and questions the appropriateness of the partnership policy in the context of vital capital-intensive industries.