Editorial Tuesday 26 June 2012: Going South with the PFI - administration and politics

We reported last night on the story of Health Secretary Andrew Lansley putting South London  Healthcare Trust into impending administration-type special measures.

If Health Policy Insight were less tirelessly charitable about the government of the day than we are, we might remark on what a relief it is that the old ways of top-down command-and-control are behind us.

We are not such cynics, thank goodness.

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Click here for details of 'The Tao of Andrew Lansley', the new issue of subscription-based Health Policy Intelligence.

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Health Service Journal has good coverage here, including this link to a 'war-gaming' exercise on what would happen in the event of a crisis.

The Kings Fund commissioned this excellent document on South London reconfiguration from Keith Palmer (now a non-executive director of Monitor).

The Guardiansummarises some key reaction here, including Health Select Committee chair Stephen Dorrell MP's comments on BBC Radio 4's Today that PFI "as originally conceived 20 years ago was to achieve some risk transfer, to engage the private sector in making this kind of judgment and to carry some of the risk ... (but regrettably) agreements were signed which effectively paid private sector cost when the public sector took the risk. That is indefensible".

Dorrell made the fascinating suggestion that private sector lenders should take a Greece-style 'haircut' on loans, if either or both of the PFI hospitals should close.

It seems staggeringly unlikely that the contracts permit for this, but we shall see.

Health Policy Insight has been pointing out for some time that PFI has an economic flaw at its basis: a government with a sovereign currency can always borrow money more cheaply than the market can. Think printing ...

More to the point, the transfer of risk has been a fiction, as even the Commons Treasury select committee and smarter Conservative MPs now acknowledge.

Public sector comparators were even further on the game than Mata Hari.

A vintage mess
PFI is not even recently known to be a joke.

Diane Dawson and Professor Alan Maynard were onto this in 1996 with 'Private finance for the public good?' in the BMJ, and Professor Alysson Pollock has been researching PFI for years.

Private Eve has also been following the unfolding mess assiduously.

Nine years ago in 2003, the Commons Public Accounts Committee reported "some significant weaknesses in the use of public sector comparators ... Dartford and Gravesham Hospital NHS Trust did not detect significant errors in the public sector comparator. The Trust also did not quantify the full effects of changes in contract terms and of the sensitivity of the deal to changes in key assumptions, as the deal went forward. Had the Trust known that the savings were marginal when negotiating the deal, it might have made different decisions and achieved better value for money. The NHS Trust selected two firms to submit final bids but one of the firms did not submit a bid.

"The Trust therefore ended up with only one final bidder on this major pathfinder project for the use of the PFI in the NHS. The bidder's final bid was 33% higher in real terms than its indicative bid. The Trust did not undertake a detailed analysis of the reasons for the increase in the final bid, especially given the absence of other bids. Such action might have helped the Trust to secure a greater price reduction in the subsequent negotiations.

"West Middlesex Hospital NHS Trust's advisers strove to make slight adjustments to the calculations, well within the range of error inherent in costing a 35 year project, so that the PFI cost appeared marginally cheaper than the public sector comparator. The preferred bidder agreed to hold its price for seven months but it took the Trust eleven months to close the deal. The price increased after the commitment period had expired so the price commitment had only limited effect. The principle of securing a price commitment to deter "deal creep" is good, but a department using this approach needs to be sure that it can close the deal whilst the commitment still holds.

"Advisers' costs in PFI deals can exceed budgets by significant margins. On the Dartford and Gravesham Hospital deal (12th Report, Session 1999-2000) the Trust incurred advisers' costs of £2.4 million, which exceeded the initial estimates by almost 700%. After a series of hospital PFI deals, the Trust spent £2.3 million on advisers on the West Middlesex Hospital deal (19th Report, Session 2002-03), virtually the same amount as at Dartford and Gravesham four years earlier.".

The PAC revisited PFI in 2011, and found that "as with previous Reports, we again found no clear and explicit justification and evaluation for the use of PFI in terms of its value for money ... there is no clear evidence of whether PFI is any better or worse value for money than other procurement routes. There were instances where PFI may have been used where there was no evidence that it was the best procurement route.

"Government is missing a trick in failing to secure the appropriate financial advantages for the taxpayer. Specialist financial institutions have been bundling projects together. This gives them the prospect of greatly enhancing the value of their interests in the projects through economies of scale. We are very concerned that the Department of Health has not approached the major investors and contractors to negotiate a share in these efficiency gains and economies of scale ... reports suggest that in some hospital projects the investors are receiving returns of ten times their initial investment.21 When pressed, the Department accepted that it would be possible to try and renegotiate contracts to reduce costs.

"The Department of Health does not know whether services provided more cheaply in some locations are better value for money, or alternatively poor quality, or reflect inconsistencies in the way costs are recorded.

"It seems that the central team in the Department of Health is already under-resourced and unable to secure proper value for money from these contracts. It would be a false economy to have weak central teams that are unable to implement our recommendations, all of which are aimed at delivering better value for money in the long term.

"To be approved, PFI projects should be assessed as being value for money compared to other funding options. This usually involves comparison to a theoretical model called the public sector comparator. The Department of Health noted that in some cases PFI deals went ahead with the PFI option marginally more expensive than the public sector comparator.

"One of the stated benefits of PFI is that it should ensure buildings are maintained to a high standard through the contracts’ lives, yet 20% of Trusts were not satisfied with the maintenance service provided within their PFI contracts. In addition, unlike support services, the costs of maintenance cannot be revisited and are not subject to regular benchmarking.26 The Department of Health had not addressed this issue. It had been unsure about the viability of negotiating lower maintenance costs, Trusts had not been very supportive of such action and the Department had consequently not taken up the matter with suppliers.

"The Department of Health has a team of only four people to support Trusts with operational PFI contracts and there is uncertainty about the future of this team. In addition, 36 % of Trusts have less than one full time person managing their PFI contract and a further 12% do not have anyone spending at least a day a week managing their contract".

PFI - as favoured by Ed Miliband
Thanks to our friends in the Socialist Health Association, HPI was able to report from the Labour leadership campaign's health hustings.

This is what Labour leader Ed Miliband said about PFI: "let me put it in personal terms. My Dad ended his life in a hospital in London which was a dilapidated broken-down hospital, bad for patients and bad for staff. My son was born in a hospital nearby 15 years later which was a brand new hospital built under the private finance initiative - UCLH. I know because of demands on the public purse that that hospital wouldn't have been there if we weren't willing to use PFI.

“I understand the concerns people have in the audience: on the costs of debt that are going to be paid back in the future; about inflexbilities of some of the contracts (which aren't just an issue in PFI hospitals but in PFI schools as well). We have to look how we can better regulate costs going forward and deal with some of those inflexibilities.

“In the end, you have got to make fundamental choice and answer the fundamental question which is - have we improved people's quality of life - both people who use the Health Service and work in it - by use of PFI?

“It's my view (not popular with everyone in this audience) that the answer is unquestionably yes. It's a massive abdication of responsibility if we say we won't use PFI. My son wouldn't have been born in the new hospital, thousands and millions of people around the country would have still been treated in old, broken-down hospitals which existed under the last Tory government” (Applause)".

PFI is not the only factor in South London's woes; as Keith Palmer's analysis points out nicely.

That doesn't stop PFI being an unnecessary, avoidable waste of taxpayers' money. It should have been more widely discredited and stopped a long time ago.