Bankers' licence to rip off NHS
Debate over private sector involvement in the financing and delivery of health services has steadily increased over the last few years. Last autumn Health Secretary Alan Milburn signed the controversial "concordat" with private medical providers, under which the NHS will pay for the treatment of waiting list patients in "spare" beds in private hospitals.
In February, Milburn unveiled the latest list of major hospital schemes which he has given the go-ahead to proceed using private funding, as part of the government’s declared goal of establishing £7 billion-worth of hospitals funded through the "Private Finance Initiative" by 2010, as set out in last year’s NHS Plan.
During the election campaign, and in Labour’s election manifesto there was an emphasis on increased "partnership" with the private sector in the provision and operation of hospital services, including the establishment of new stand-alone "health factories" to deliver elective (waiting list) treatment..
During the summer came the shock announcement that the NHS had bought up a loss-making 95-bed private hospital specialising in heart surgery: it had been running with only 50 percent of its beds occupied. Managers of the UCLH Trust that will take it over admitted that over a third of the patients in this new "NHS hospital" will be continue to be private patients.
This increased involvement with, dependency upon and indebtedness of the NHS to the private sector has been strongly opposed by all of the organisations representing health workers. Among the most vocal critics has been the British Medical Association, which has consistently rejected the core assumptions of the Private Finance Initiative.
What is PFI?
The initials stand for Private Finance Initiative: PFI is a Tory policy, first devised in 1992, which was strongly denounced by Labour’s shadow ministers until a few months before the 1997 election.
According to Tory Chancellor Kenneth Clarke, who in 1993 introduced the policy, initially for NHS projects costing £5m or more, PFI means:
"Privatising the process of capital investment in our key public services, from design to construction to operation."
Despite its popularity with ministers, and especially with the Treasury team, PFI has incurred the increasingly vociferous opposition of the BMA, the Royal College of Nursing, almost all trade unions, local campaigners in affected towns and cities, and a growing body of academics.
What does the policy involve?
Large-scale building projects, which would previously have been publicly funded by the Treasury, were to be put out to tender, inviting consortia of private banks, building firms, developers and service providers to put up the investment, build the new hospital or facility, and lease the finished building back to the NHS – generally with additional non-clinical support services (maintenance, portering, cleaning, catering, laundry, etc).
Lease agreements for PFI hospitals are long-term and binding commitments, normally at least 25 years. The NHS Trust involved, instead of paying capital charges to the Department of Health on its NHS assets, pays a "unitary charge" to the PFI consortium, which would cover construction costs, rent, support services, and the risks transferred to the private sector.
The big difference from capital charges is that not only are the costs much higher, but PFI "unitary payments" don’t circulate back within the NHS. Instead they flow into the coffers of the private companies, from where they are issued as dividends to shareholders.
The appeal of PFI both to the Tories and to the Labour government is that it enables new hospitals and facilities to be built without the investment appearing as a lump sum addition to the Public Sector Borrowing Requirement.
The government can appear to be funding the "biggest ever programme of hospital building in the NHS", while in practice injecting less public capital than ever. Only six major NHS-funded schemes, totalling less than £300m, have been given the go-ahead since 1997.
By contrast, the Labour government has so far given the go-ahead to 38 PFI-funded NHS schemes totalling almost £4 billion, and aims to increase this to £7 billion by 2010. The NHS Plan calls for a total of 100 new hospitals. 85% of all new capital investment in the NHS is now coming from the private sector.
But as with all borrowing, the short term benefits of PFI are outweighed by the long term costs. By 2007 the annual cost to the NHS of PFI payments involved in leasing these privately-owned, profit-making hospitals, and buying ancillary services from private contractors, will be in the region of £2.1 billion: together with capital charges, the total bill will add up to £4.5 billion a year.
These – and other, less obvious, costs are being picked up by the taxpayer, by patients through a squeeze on budgets for clinical care, and by hospital staff struggling to keep the service afloat under mounting pressure.
How PFI costs more
Increased "headline" costs of schemes
PFI hospital projects have become notorious for the massive level of increase in costs from the point at which they are first proposed to the eventual deal being signed.
In part this is because PFI consortia are keen to make each scheme as big as possible, and also because private firms prefer to buy and then build on greenfield sites and lease buildings back to the NHS rather than refurbish existing NHS hospitals.
Among the more dramatic increases in prices from original plan to PFI deal are:
Greenwich: up from £35m in 1995 to £93m in 1997
UCLH, London: up from £115m to £404m
Leicester: up from £150m in 1999 to £286m in 2001
South Tees: up from £65m to £122m
Swindon: a £45m refurbishment of Princess Margaret Hospital in Swindon turned into a £96m new hospital on a greenfield site out by the M4.
The first 14 PFI deals escalated in cost by an average of 72 percent, from a total of £766m to £1,314m by the time they were approved.
This inflation has obviously had an impact on the final bill to be paid. The new Dartford Hospital was originally projected to be "at worst cost neutral", but it soon emerged that purchasers were going to have to foot the bill for an extra £4m a year if the Trust were to be enabled to pay the PFI costs.
Rate of return for private investors
PFI consortia don’t build hospitals for the sake of our health. They want profit for their investment.
A BMJ article in 1999 pointed out that shareholders in PFI schemes "can expect real returns of 15-25 percent a year", and went on to explain how little actual risk is involved for the companies in PFI consortia.
In Barnet, the second phase of the new general hospital, originally tendered at £29m, went ahead at a cost of £54m, with capital borrowed at 13% over 25 years. In Dartford the rate was 11%, and the £17m annual payment represents a massive 35% of the Dartford & Gravesham Trust’s revenue.
The new Worcester Royal Infirmary, a project which was originally estimated at £45m when it was first advertised for PFI tenders in 1995, was eventually given the go-ahead at a total cost of £110m.
But the annual charge of £17m is more than a quarter of the Trust’s projected income. Of this, £7.2m is the "availability" charge, or lease payment on the building, giving a total cost of £216m to rent the hospital for 30 years. The scheme will cost the Worcestershire Health Authority an extra £7 million a year.
While most NHS Trusts spend around 8% of their income on capital, those with PFI schemes are spending between 12% and 16%. In part this is because the private sector has to pay more to borrow money than does the government – but the net result is that the taxpayer picks up an inflated bill, while the banks coin in an extra margin.
Margins for PFI consortium partners
The profits flow to the private sector at every level in PFI. Building firms, banks, business consultants and other PFI hangers-on are eagerly anticipating a generous flow of profits as the first hospital schemes take shape.
An investigation in the Health Service Journal showed building contractors "expecting returns of up to 20 percent a year on the equity stakes they hold in the project companies" as soon as the building is complete and Trusts start paying up for the use of the new buildings. Consultancy firms, too – architects, engineers and surveyors – are pocketing above average fees for work on PFI schemes. As the HSJ article pointed out: "there is little chance of the construction industry losing interest in PFI hospitals".
And once the building is finished, maintaining and providing services in the buildings will deliver comfortable, guaranteed profits of up to 7 percent for firms holding service contracts. The first two waves of PFI hospital schemes all involved the privatisation of any non-clinical support services that were not already in the hands of the contractors.
Fewer beds
The first wave of PFI hospitals became notorious for the scale of the cuts in bed numbers they represented, with reductions in front-line acute beds ranging as high as 40%.
PFI planners wanted to axe almost 40% of beds in Hereford (from 414 to 250) and North Durham (from 750 to 450) – and as a result the newly-opened North Durham Hospital has been plunged into an immediate beds crisis. Two other PFI hospitals embodying large-scale bed reductions have so far opened, in Dartford and in Carlisle, and both are already struggling to cope with pressures on the depleted numbers of beds remaining.
These bed numbers were based not on the actual experience of front-line Trusts dealing with current levels of caseload, or on any actual examples of hospital practice in this country, but on the wildly over-optimistic projections of private sector management consultants working for PFI consortia.
The verdict is still awaited on one of the other big bed cuts based on this type of approach, in Worcestershire, where the Health Authority forced through plans to for a new PFI-funded Worcester Royal Infirmary which would cut 260 acute beds – over 200 of them in Kidderminster – as well as beds in Redditch – a county-wide cutback of 33%.
In Edinburgh the new Royal Infirmary will involve a loss of 500 of the existing 1,300 beds, and a halving of the 6,000-strong workforce.
But the shape of PFI schemes – or at least the way they are presented – has changed since the findings of the NHS Beds Inquiry, commissioned by the Labour government to report on the adequacy of bed numbers. Alan Milburn has become more sensitive to the charge that PFI is further reducing front-line capacity.
After intervening (again in the aftermath of a strike) to force the UCLH scheme in central London to be expanded to include additional beds (at dramatically increased cost!), Milburn has insisted that new PFI schemes must at least match the existing numbers of acute beds.
One beneficiary of this decision could be the population of East Kent, which had been facing a cutback of almost 400 beds in a massive PFI-funded rationalisation scheme that was to axe local A&E units, and reduce acute services from four hospitals to one.
Where are the promised extra beds?
Mr Milburn has gone further and insisted that the historic run-down of hospital bed numbers will not only be halted but reversed, through PFI schemes.
"Overall, these new hospital developments will provide almost 3,000 extra beds on the number currently provided. Indeed, in every single one of these new developments more beds, not less, are now planned."
This has in turn led to a further escalation in the costs of the new generation of PFI schemes, but the Department of Health remains coy on the numbers of beds to be provided in new PFI schemes.
Indeed there is little, if any evidence in the figures published by the Department to support Milburn’s claim that the second and subsequent waves of PFI schemes will increase bed numbers at all, let alone by the hefty 3,000 figure he has claimed.
Even if these promised beds do eventually materialise, they will come only after almost 2,000 beds (27% of the total) have been cut in the first ten PFI schemes – a cutback that will still distort health services locally for years to come.
Another factor in assessing the impact of bed reductions and service changes under PFI is that a cut in the number of front-line acute beds may be masked by an increase in the numbers of less intensive "intermediate" beds, which are then included in the totals.
This is the case in South Birmingham, where the Trust is proposing a PFI scheme that would cut over 200 of the present 1017 acute beds, but replace 150 of them with cheaper on-site "intermediate" beds. The numbers are further confused by adding in another 100 intermediate beds outside the hospital, 85 of which are to be transferred from other existing hospital sites.
Intermediate beds can play a role in the longer-term care of frail elderly patients, but do not play the same role as front-line acute beds in dealing with emergencies and waiting list patients.
The issue of intermediate beds is central to the debate over adequate bed numbers. Recent reports have highlighted the demand by consultants at Carlisle’s Cumberland Infirmary for an urgent 50-bed extension to the PFI hospital to reduce the numbers of cancelled operations.
But Trust managers are sticking to the line of the PFI plan, that the number of beds is right, but that there are too many of the "wrong type of patients" in them, who ought to be transferred to "intermediate" beds elsewhere.
And a new Birmingham University report on the massive bed cuts proposed as part of the Herefordshire PFI scheme has concluded that the Trust will only be able to meet government waiting list targets if more beds than planned are kept open. The consequence could be that old-fashioned "hutted wards", which were due to close with the opening of the new hospital would have to stay open indefinitely.
However the figures are massaged, the pressures of rising demand for emergency treatment, and for waiting list care will expose any weaknesses in the new system planned around the requirements of PFI and the private businesses involved.
Consultancy fees/negotiation costs
The first 15 PFI schemes for new hospitals spent a combined total of £45 million on advisors, with costs varying between 2.8% and 8.7% of the capital cost of the project. These costs are heavily inflated by the need to strike legally-binding deals with private sector firms in what are often very complicated deals.
This pattern has continued, and according to health minister John Denham the first 18 PFI schemes squandered £53m on consultancy fees – with £24m pocketed by lawyers, £16m to accountants, and £12m spent on "other" advice. Bromley Hospitals Trust alone had spent £3m on negotiations by 1997.
Delays in major projects – and in smaller ones, too
The complexity of the procedures and process of PFI and the negotiations that it involves has brought a new level of delay to schemes which might otherwise have proceeded with public funding.
In Oxford, attempts to find PFI capital to relocate and centralise hospital services from the Radcliffe Infirmary to Headington, close to the other main hospitals, have been dragging on since 1996, and already collapsed once. Negotiations on the scheme, originally costed at £71m, have been a closely-guarded secret, but the latest projected capital cost has risen to £91m.
In East Kent NHS Regional bosses have warned that the plans for a new PFI hospital to replace four existing hospitals – the projected cost of which has already almost doubled to £102m – could take 4-7 years to complete the complex PFI process before a brick is laid.
Even more serious have been delays in projects which are smaller, and which do not involve high-profile general hospitals. In London the Brent Kensington Chelsea and Westminster Mental Health Trust wants to improve its community services, at a cost of around £24 million: but the project has been log-jammed since 1998. In June the local health authority was told that:
"The Regional Office has said that the Trust must establish whether there is private sector interest in funding and managing the proposed new facilities. … What seems clear is that the development at Woodfield Road could be more attractive to the market because this is a new development. Schemes that involve refurbishing facilities are less attractive. However the scheme is a small one in cost term and may be below the level at which most companies would be interested."
If the Trust has to advertise the scheme for PFI bidders, the HA is warned that: "Clearly this could add several months to the timetable. If any part of the scheme is then funded privately the Trust estimates this will add a delay of another 12 months."
And with consultancy fees so high, and property prices still rocketing upwards in the capital, all this extra time is likely to cost much more money, too.
Staffing levels reduced
The Cumberland Infirmary scheme involved a cut in clinical staff of £2.6m, and in North Durham the financial balance of the plan involved staff cuts to save £3m.
In Bromley, the Full Business Case projects savings in staff costs of £2.9m a year, which arise, among other things, from "the reduction in the number of beds and theatres. 136 jobs are expected to be axed, including 34 nurses and 8.5 doctors, while the reduction in qualified nursing is to be compensated by a higher ratio of health care assistants.
Privatisation of support services and staff
In the first few PFI hospital schemes, staff working in non-clinical support services have been routinely "sold on" to private contractors providing "facilities management" for the PFI consortium. Their pay and conditions were safeguarded only by the fragile TUPE (Transfer of Undertakings) rules, which protect only existing staff – leading to a 2-tier system in which new employees are on different term and conditions – and which can easily be circumvented by unscrupulous employers.
In the summer of 1999, after a campaign of strike action, union members at University College Hospital, London won a ground-breaking agreement enhancing the protection of the pay and conditions of support staff transferred to the PFI contractors. But staff still stand to lose their entitlement to the NHS pension scheme and sickness payments.
Since the 2001 Election, Alan Milburn – in the aftermath of nearly a year of strike action by support staff at Dudley Hospitals Trust fighting their compulsory transfer to a private contractor as part of a PFI deal – has now announced three "pilot" schemes, in which support services will be separated from the financing of the new building.
However hospitals which have already been cleared to proceed with schemes incorporating support services will be allowed to go ahead, and it appears that the management of support services could still be handed to the private contractors, while the staff they manage remain employed by the NHS.
It is not yet clear whether the PFI consortia will agree to this loss of what they saw as a valuable additional income stream. It is possible they will respond by seeking to increase other charges to compensate for the loss of additional profit.
A document for the Barts and the London Trust, discussing the so-called "Soft Facilities Management" services (portering, cleaning, catering and laundry) pointed out that "Potential bidders view the inclusion of Soft FM services as important to making the Trust’s Project attractive".
In a document larded with management jargon, the Trust board were also told – contrary to all the experience of NHS staff who have been switched to private contractors – that:
"There are potential benefits for the staff concerned … Terms and conditions may be better than the NHS can afford to offer." [!!] "Transferred staff will be part of a larger, specialist FM provider organisation which can enhance career progression and provide better training and development."
Loss of additional income (car parking, shops, catering, etc)
In the new North Durham hospital, the WRVS volunteers to pay rent to the PFI consortium for space in the new building, while patients have to fork out up to £25 per week to watch the new bedside TVs.
These are just some of the changes that will be ushered in when private firms own the hospital and its surrounding facilities. Car parking charges and rent from shops, cafes and restaurants on the hospital site, which might previously have gone to the Trust, are now another income stream for the PFI consortium.
These services also move out of the control of the Trust: in Cardiff, the new PFI-funded car park at the giant University Hospital of Wales now levies punitive charges on patients and visitors, backed up by zealous imposition of fines of up to £25, regardless of the circumstances. The Trust is powerless to intervene.
Squeeze on clinical staff
The inclusion of all non-clinical support services in rigid, legally-binding "unitary payments" effectively top-sliced from Trust budgets under PFI creates a new pressure on staff in clinical services.
Clinical services become the only area of Trust spending where Trust managers can seek the "cost improvements" and "efficiency savings" which they are required to make each year by government and by NHS purchasing bodies.
As the Wellhouse Trust was told in the negotiations over the new Barnet General Hospital – where even medical records have been incorporated into a PFI contract in a new computerised system:
"Part of the price … has been to agree to an indexation regime which has no in-built cost improvement and is linked to the published RPI index … The Trust will not therefore be in a position to impose Cost Improvement Programme targets across most of its support and operational services. … The scope for future mandatory CIP targets will be limited to clinical services and to the few support services remaining under the management of the Trust."
Squeeze on community and other services
If more has to be spent in paying inflated costs of building new acute hospitals through PFI, less cash is left in the pot to finance other aspects of health care in each area.
As we have seen, many of the first wave of PFI hospitals have had to be heavily subsidised by local health authorities in order to make them affordable. The Worcestershire scheme means that an extra £7 million is being allocated to acute services to enable the Trust pay for the new WRI: this has to be found by squeezing cash allocations for mental health, community services and primary care.
Poor quality buildings
Much of the argument in favour of allowing the private sector to own and manage as well as build new hospitals, and for the long terms of lease agreements under PFI has been that the result will be a higher-quality building. Unveiling the latest round of PFI schemes receiving the rubber stamp, Alan Milburn argued that:
"For too long investment in NHS infrastructure has been a low priority when it should have been a high priority. Capital investment in the NHS was lower at the end of the last Parliament than it was at the beginning.
"The consequences are plain for all to see. Buildings that are shoddy, equipment that is unreliable, hospitals that are out of date. In too many places the environment that staff work in and patients receive care is simply unacceptable."
But the experience has been NEW buildings which are shoddy and NEW equipment that is unreliable – at a higher price than before. After just a few months of the first PFI hospitals coming on stream:.
In Carlisle, a chapter of disasters and catastrophes began with an impractical design – with a huge glass roof, but no air conditioning – and continued with the use of cheap sub-standard plastic joints for pipes, resulting in leaks of water and sewage. Faulty equipment and fittings have brought a succession of power cuts, while cuts in support staff have meant that broken equipment goes unrepaired. Walls are too thin for staff to be able to put up shelves.
In Dartford, too, plumbing was a central issue in the new hospital. Taps ran dry in operating theatres a fortnight after the hospital opened, and supplies of sterilised supplies ran out, bringing elective surgery to a halt. Consultants complained that the portering contract did not cover wheeling patients back to wards after operations.
In North Durham the saga continues, with generator failures plunging operating theatres ITU and casualty into darkness, overheating, poor planning, and plumbing faults which include sewage flooding through ceiling areas and cold taps that give out hot water.
Trust managers in response to the Observer article detailing the problems in Carlisle hit back arguing that the standard of the PFI building and the "teething problems" of the new hospital were no worse than normal in new NHS-funded hospitals (all of which of course are built by private construction firms). Critics point out that simply being no worse than new NHS-funded buildings, does not seem to justify the extra cost and other problems of PFI.
Land assets stripped: NHS as tenant
Many PFI deals are part-funded by handing over to the consortium "spare" NHS land and building assets released as part of the new scheme. Although this defrays some of the initial costs – and therefore reduces the monthly "unitary charge" which it must pay, the Trust then becomes a tenant, renting its key acute facilities from the private sector.
This has two important consequences for the future:
Once the NHS assets – paid for over the generations by the taxpayer – have been passed over in this way, the Trust no longer has any scope to use them in future service developments. The initial cost of any future schemes will inevitably be higher – and the probability of having to seek additional financial investment from the private sector is increased. And at the end of the contract period, the NHS Trust is likely to be in a weak position to negotiate over a further extension of the lease agreement.
The PFI deal effectively locks the Trust in to a long-term commitment to maintain services around the new hospital or PFI-funded facilities – no matter what changes may take place in local health needs, medical techniques or population over the next 25-60 years. The flexibility of owning land and buildings and being able to take decisions over how they should be used is seriously reduced.
Looming threats
Pressure to include other services
The government’s election pledge to set up specialist free-standing surgical units was linked to suggestions that some or all of these might be built jointly with, or run by, the private sector.
This would raise once again the thorny issue of the employment of clinical staff – nurses, doctors and professionals – by private firms or PFI consortia, a policy which successive Labour health secretaries have insisted they would not implement.
However the building of new units would open up the possibility that rather than transferring staff from the NHS to a private employer, staff might simply be recruited to a privately owned and managed unit, conducting work on contract for the NHS – as indeed will an increasing number of private hospitals as a result of the government’s Concordat signed last year.
Private sector companies have long pressed for the extension of PFI into a number of clinical areas including radiology and imaging services, pathology, and specialist nursing. In April 2000 the Welsh Assembly intervened to block plans that would have transferred NHS nursing staff at Glan Clwyd hospital near Rhyl to Fresenius, a private firm that was preferred bidder for a new renal and dialysis unit.
The rising tide of PFI costs
NHS schemes completed, under construction, or on the list for approval between now and 2006 already add up to a staggering £6.4 billion, and a quick look at the tables in the Appendices below shows that the sums of money committed in terms of annual payments are far larger than that, with most deals lasting 25 years or more.
Adding up the data from the tables shows that the combined unitary payments on the six PFI hospitals which are already operational adds up to £83m a year, giving a total payable of £2.4 billion – SIX TIMES the capital value of £423m.
The annual fees on the next 14 schemes in the queue for which details are available add up to £250 million a year, giving a total cost of £7.9 billion – over FIVE TIMES the capital value of £1,507 million.
If these deals are replicated in subsequent PFI schemes, the NHS could wind up paying between £32 billion and £38 billion in real terms (index linked payments) to private consortia over the next 25-30 years.
The argument that support services are included in this overall cost falls flat when we contrast this cost of financing a project through PFI, in which every £1m of capital eventually costs £5-£6 million, with a standard 6% mortgage.
Every £1m could be financed this way over 25 years for just £1.94 million, less than double the amount borrowed, and with no obligation to buy any other services, and freehold tenure of the assets at the end of the deal.
The NHS is only part of the total PFI borrowing. As Sunday Times correspondent David Smith pointed out recently, based on the Treasury’s budget report, with deals worth £14 billion already generating revenue:
"Even if no new PFI deals were signed, the government would pay nearly £4 billion a year, on average, in fees and charges to PFI contractors over the next 25 years."
Of course the private sector is keen to ensure that even more deals are signed, with the potential to crank up revenues from the state for the whole gamut of PFI deals towards the £30 billion a year mark.
But how does all this represent value for the public sector? While the headline and actual costs of the large schemes are big enough to cause long-term dislocation to the finances of the NHS, the cumulative costs of financing some of the smaller schemes (less than £20m) through PFI can be ludicrously large.
Some small scale deals which ought to be affordable from one-off capital funds are to be paid off over 25 or 30 years, with a resultant cost as high as 24 times the value of the scheme. (figures below are taken from Department of Health data, "PFI schemes by Region": "total cost" is obtained by multiplying the – index-linked – unitary payment with the number of years in the contract.)
Queens Medical Centre catering: value £1m total cost £23.8m
North Birmingham Mental Health: value £12.4m, total cost £163.5m
Royal Wolverhampton Radiology: value £10.9m, total cost £70m
Rotherham Priority Elderly MH: value £2.1m, total cost £16.9m
North Bristol Brain Rehab unit: value £4.9m, total cost £42m
In some cases, management will argue that even these small-scale PFI deals represent much more than a costly hire-purchase scheme, and that significant services are included as part of the unitary payment.
But the combined deal is only available with this fixed, real terms price tag, and the value for money must be assessed in the context of the final cost compared with the initial investment.
The figures suggest that financing piecemeal schemes in this way, with all of the on-costs of bureaucracy and delays, cannot be a sensible use of NHS resources.
The more money that is squeezed out of the NHS in PFI payments to bankers and private providers, the less that remains to treat patients, pay clinical staff and develop modern, appropriate services.
This article is adapted from the PFI Dossier researched by John Lister for the GMB, the full text of which can be found on the GMB web site www.gmb.org.uk