The Private Finance Initiative

1
The Private Finance Initiative

• Advantages
• Benefits of the PFI
• The major appeal of the PFI for the
  government is that the cost of the hospital does
  not appear as an immediate lump sum payment in
  public expenditure.
• Also, the PFI may additionally
• Create better incentives to perform, as payments
  are directly linked to the contractor's
  performance.
• Offer design improvements and lower construction
  costs.
• Lead to more cost-effective support services.
• Lead to more projects being completed on time,
  although the PFI may incur higher costs of
  borrowing.
• Yield better maintained hospitals.
• Source Office of Health Economics-John Sussex
• The facts so far
• The costs of the PFI to taxpayers and patients
  are likely to be high
• The average increase in estimated cost from the
  'outline business case' is 72.
• The private finance initiative substantially
  increases the cost of hospital building. Total
  costs in a sample of hospitals built under the
  PFI are 18-60 higher than construction costs
  alone
• The new hospitals generally contain 20-40 fewer
  beds than those they replace.
• Over-budget PFI hospital schemes are being bailed
  out by taking money from community services.
• The costs of PFI contract negotiation have been
  estimated to be seven times higher than for
  traditional tendering.
• source www.centre.public.org.uk/briefings/pfi.
  html

• What is a PFI
• The Private Finance Initiative addresses the
  question of how we should finance the NHS and was
  introduced by the Conservative Government in
  1992, with the primary objective being to
  encourage private investment in major public
  building projects, like schools, hospitals and
  roads. Private investment implies that the level
  of government borrowing falls and that risk is
  transferred from the public to the private
  sector.
• A private sector consortium pays for a new
  hospital, where the consortium usually consists
  of a construction company, a bank or financier, a
  facilities management contractor and consultants.
  The local NHS trust then pays the consortium a
  regular fee for the use of the hospital, which
  covers construction costs, the rent of the
  building, the cost of support services and the
  risks transferred to the private sector. Thus, in
  essence most new NHS hospitals will be designed,
  built, owned and run by a consortium or grouping
  of companies. The NHS will employ some of the
  staff, mainly doctors and nurses and will rent
  the building and other facilities from the
  consortium for at least 25 years. The deal is
  constructed in such a way that the consortium is
  guaranteed a full return on costs including
  interest on the capital borrowed, plus an element
  of profit.

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• Disadvantages
• The PFI is a more expensive way to finance new
  hospitals. It is a 'build now, pay more later'
  scheme. To pay for the building work, the private
  companies will have to borrow the money from
  banks at a higher rate of interest than
  government funded schemes.
• The private companies will need to make a profit
  on the scheme, so there is no scope for saving
  money on building costs, unless quality standards
  are allowed to fall.
• The PFI involves the private sector taking over
  the financial and operational risk of a hospital
  for which they charge a price.
• The costs of the first schemes have been far in
  excess of what was budgeted. Thus, with PFI
  contracts guaranteed for 25 years or more, any
  future savings in the NHS will have to come from
  other services.
• Low staff morale due to poor working conditions
  can lead to poor quality health care provision
• In the long run the consortia will push for all
  staff - including the doctors and nurses - to be
  employed by private companies.
• Service planning will be distorted as
• Hospital services will be planned by private
  companies, which may result in reduced bed
  numbers, if this is more profitable!
• Companies will want to build big new hospitals to
  make big profits and will be less keen to build
  small, locally accessible community services.
• Community services will lose out as the PFI locks
  the NHS into paying for new super-hospitals for
  at least 25 years.
• Democracy will be impossible, since PFI schemes
  are shrouded in secrecy.
• source www.centre.public.org.uk/briefings/pfi
  .html and BMA website.

• Alternatives to the PFI
• Government borrowing and taxation.The traditional
  method of paying for new hospitals - through
  government borrowing - remains the cheapest and
  best. A high quality, cost-effective, appropriate
  and accountable health service can only be
  financed properly through taxation.1
• Increased allocation of Public funding to the
  NHS. One of the original purposes of the PFI was
  as a means of reducing public sector borrowing.
  This is no longer the imperative it once was, in
  view of the improved state of the economy and
  also changes in accounting rules. On the basis of
  this, there is a main alternative to the PFI,
  namely increased allocation of public funding to
  the NHS to finance building projects. It is
  acknowledged that capital has been allocated, not
  only to build new hospitals but also to update
  facilities in a number of NHS hospitals. There is
  no reason however why the level of funding
  available to the NHS should not be increased
  still further to allow a much higher proportion
  of the Government's ambitious hospital building
  programme to be funded from public money. This
  would allow evidence of likely future patterns of
  need for care to be taken fully into account
  rather than the NHS being dictated to by the
  economic imperatives of PFI projects.
• 1Source Office of Health Economics -John Sussex