By Matthew G. Dunnigan
The Private Finance Initiative (PFI) was launched in 1992 to transform “public sector organisations from being owners of assets and direct providers of services into purchasers of services from the private sector”. Initiated by the Conservative government, PFI has been enthusiastically adopted by the current Labour administration to provide “the largest new hospital building programme in the history of the NHS” and has now expanded into a wide range of public sector provision, particularly in Scotland, ranging from the initial Skye Bridge project to education and housing development. PFI or PPP (Private Public Partnerships) projects now account for a growing proportion of public sector expenditure.
PFI is essentially a lease-back arrangement in which a private consortium of banks and construction companies designs, builds and operates a public sector project in return for capital and interest payments, usually paid over a thirty year time scale and known as the availability payment. PFI was originally seen as a way of avoiding expansion of public sector debt (the public sector borrowing requirement). Unfortunately, private capital is provided at substantially higher interest rates than are available from the Treasury. Formerly, capital for public sector developments such as hospitals was seen as a “free good” and provided from the Treasury as a capital grant. The lease-back arrangements involved in a PFI project result in the transmission of a growing burden of debt repayment to the next generation of taxpayers. The greater costs of PFI schemes have been authoritatively described by Professor Allyson Pollock and her colleagues in relation to new hospital construction.
The present report summarises the results of adopting a PFI scheme to replace the ageing Royal Infirmary of Edinburgh. The PFI contract was signed in July 1998 and the new hospital is due to open in 2003 on a greenfield site on the outskirts of Edinburgh at Little France.
Construction of new hospitals by the PFI route imposes a heavy financial burden on Health Authorities and Trusts. Providing the capital costs of constructing and equipping the new Royal Infirmary of Edinburgh by a capital grant as a “free good” in the public interest would have incurred costs of £279 million (Royal Infirmary of Edinburgh: Full Business Case). The cost of building the hospital by the PFI route involves capital and interest repayments of £26.6 million pounds annually over a thirty year repayment period (PFI and capital charge costs), a total of £798 million pounds. This payment, ultimately derived from the taxpayer, must be deducted from the new hospital’s revenue income, and reduces the revenue income available to all Lothian Health Board hospitals.
The burden of repayment costs are partly reduced by locating new PFI hospitals on greenfield sites where the capital costs of land purchase are cheaper. Removal of a hospital to a peripheral greenfield site has the additional advantage that valuable sites of redundant hospitals in the city centre can be sold off for housing and commercial developments. This reduces the capital costs of the new hospital and provides an additional source of profit to the consortium managing the PFI scheme. In Edinburgh this involves the sale of the Dental Hospital, the City Hospital and the Princess Margaret Rose Hospital; the ultimate fate of the old Royal Infirmary (a listed building) remains uncertain.
Capital and interest payments for new PFI-financed hospitals are also reduced by downsizing the capacity of the new hospital. This involves reductions in acute beds (about 30 percent fewer for all first-wave PFI hospitals) with consequent savings in nursing, technical and ancillary staff salaries. The large capacity reductions in downsized PFI financed hospitals are justified by postulating efficiency savings from reduced inpatient lengths of stay, higher occupancy levels and transfers of inpatients to day surgery and post-acute settings. The latter include transfers to NHS geriatric long-stay beds and increasingly to means-tested social work and private care settings with supportive home care in the primary care sector. This untested and unevaluated “vision” of more efficient (and cheaper) health care was incorporated into Lothian Health Board’s Integrated Healthcare Plan 1996-2003.
In a further attempt to reduce costs, catering, portering and other ancillary services are handed over to the private sector in all PFI projects, usually with inferior salaries and conditions of employment for staff formerly employed by the NHS. These are among the most poorly paid workers in the United Kingdom. The private sector companies responsible for ancillary services are remunerated by a “facilities” payment incorporated in the Full Business Case
Indications of the financial pressures on Lothian Health Board and the Trust responsible for the management of the new Royal Infirmary can be gained from the Full Business Case. Annual capital charges for the old hospital of £14.5 million will rise, as noted above, to £26.6 million, an increase of from 9.3 percent to 18.4 percent of total annual revenue expenditure. The reduced expenditure available for running the hospital will be partly met by reducing the total manpower budget from £93.1 million to £77.2 million (a 17 percent reduction); this includes 21 percent reduction in the nursing budget. A reduction in bed capacity between 1998 and 2003 of 12 percent (988 to 869 beds) appears relatively small. This reduction is misleading, however, since it does not take into account bed losses from the closures of three smaller acute hospitals in Edinburgh, bed reductions in two other large acute hospitals (the Western General Hospital and St. John’s Hospital at Howden) and previous downsizing of capacity since 1996 (see below).
Given the current healthy state of Treasury finances, with a large budget surplus, it is now obvious that PFI projects are a bad buy for the taxpayer. They will impose an increasing burden of debt on the next generation of taxpayers in a large-scale version of the “buy now, pay later” approach to spending with the accumulation of credit card debt. NHS PFI-financed projects involve a cost-cutting exercise which will create smaller acute hospitals at a time when rising demand for acute hospital emergency and elective care is exacerbating long-standing demand-supply imbalances in patient care. These are destabilising the NHS and putting the very concept of an NHS “free at the point of use, according to need” at risk
The effects of the substantial downsizing of the acute hospital sector in Lothian Health Board hospitals, largely driven to finance the costs of the new PFI-financed Royal Infirmary of Edinburgh, are already evident. These are the subject of a detailed study by the author of changes in capacity and clinical activity in Lothian Health Board hospitals compared with other Scottish hospitals between 1990-91 and 1998-99 which will be available shortly. Between these years, Lothian Health Board hospitals lost 34 percent of their acute bed capacity compared with 15 percent for all other acute hospitals in Scotland. These large bed reductions have resulted in substantially greater pressures on acute bed capacity in Lothian Health Board hospitals than in other Scottish hospitals, particularly in winter, leading to rising occupancy levels, the decanting of patients into inappropriate beds, postponed or cancelled elective admissions and long waits for admission to acute beds in the Royal Infirmary from its A&E department. The effects are an exaggerated version of the growing capacity crisis in all NHS acute hospitals. Incredibly, despite these problems, Lothian Health Board plans to reduce acute bed capacity in its acute hospitals by a further 8 percent between 1999 and 2003.
The construction of a poorly accessible, downsized new hospital in Edinburgh is poor Value for Money (VFM). The financial burden resulting from the Labour government’s love affair with the private sector, designed to repair Britain’s neglected public infrastructure, will cost the taxpayers dear.
For further reading see the website: www.scottishleftreview.scot