PFI
hospitals are “lunacy”, says Conservative Party
Strange things are happening in the
Conservative Party. On
In a statement headed Lunacy as Labour wastes £45 billion on NHS
hospital projects [1], he called “for a fundamental review after it emerged that
the National Health Service will have to pay private sector contractors an
incredible £53 billion for hospitals worth only £8 billion”. The statement continued:
“Describing the cost of
the Private Finance Initiative deals as ‘complete lunacy’, the Shadow Health Secretary
said: ‘For all too many hospitals, PFI has turned into a straightjacket. It is
time for a fundamental review of how the NHS accesses capital for future
investment.’”
Brown’s preferred mechanism
Although Conservative Chancellor,
Norman Lamont, was responsible for the invention of PFI in the
early 90s, it wasn’t used much until New Labour came to power in 1997. Then, it became Gordon Brown’s preferred
mechanism for acquiring finance for public sector projects.
PFI is first and foremost a form of public
borrowing, which, like conventional public borrowing, has to be paid back with
interest by the state. In fact, PFI is
an expensive form of public borrowing, more expensive that the conventional
method. It is more expensive because the
state can always borrow money more cheaply than the private sector (because,
whereas a private corporation may go bust and default on its debts, the state
will not). The essence of PFI is that
the state employs a private agent to borrow on its behalf. As such, PFI wastes taxpayers’ money and a
prudent Chancellor would ban its use for public projects, rather than insist on
its use, as Gordon Brown has done.
What happens is that a public body
enters into a contract with a private consortium to borrow capital to build a
school or a hospital, to carry out the building and to provide additional services
(such as building maintenance or cleaning) for a period of 25 years or
more. Under the contract, the public
body undertakes to pay the consortium a unified charge covering interest,
capital repayment and additional services.
Why waste
taxpayers’ money?
Why is our supposedly prudent
Chancellor addicted to PFI as a mechanism for financing public projects? Answer: because PFI debt is not usually treated
as public borrowing for accounting purposes and therefore doesn’t contribute to
the Public Sector Borrowing Requirement (PSBR).
In other words, PFI debt is off-balance sheet, even though the state is
ultimately responsible for repaying it. (The
Office of National Statistics, which is answerable to the Chancellor,
determines whether public debt is on or off balance sheet).
So, as a result of the Chancellor’s
use of PFI, total public borrowing is officially less than it would have been
had the Chancellor gone down the cheaper route of conventional borrowing. This makes it easier for him to meet his
self-imposed “sustainable investment” rule that total public borrowing
shouldn’t exceed 40% of gross domestic product (GDP). In other words, in order to make himself look prudent with regard to the total volume of
public debt, the Chancellor insists on the imprudent use of PFI borrowing,
which costs the taxpayer more than conventional borrowing.
Of late, Conservatives have been
questioning the fact that PFI debt is off-balance sheet. On 30 March 2006, Conservative MP, Brian Binley, raised the matter in the House of Commons with Des
Browne, then Chief Secretary of the Treasury [2]. The question was posed: what would be the
consequences of moving PFI debt on to the Government’s books, to which Browne
replied that “such movement on to the balance sheet would put the country in a
position in which it could not meet the sustainable investment rule and thus
could not invest further in public services and our infrastructure”. There you have it in a nutshell: PFI is used to
keep on balance sheet debt down, so that the Chancellor can meet his “sustainable
investment” rule.
PFI straitjacket
Andrew Lansley’s
criticism of the use of PFI for building NHS hospitals doesn’t specifically
mention the higher than necessary interest rates associated with PFI
borrowing. But he does identify the
other extraordinarily stupid aspect of PFI - the fact that public bodies are
locked into very long term contracts for the provision of services, services
which may not be required in 5 years, let alone 25 years time.
Lansley described PFI deals as
"complete lunacy", saying:
"For all too many
hospitals, PFI has turned into a straightjacket. It is time for a fundamental
review of how the NHS accesses capital for future investment ...
"Six years ago,
Labour promised the biggest ever hospital building programme in the history of
the NHS. Now, they say they do not want care to be provided in hospitals after
all. It is perverse that, with hospitals around the country now suffering
cutbacks and closures, over 80 NHS organisations are locked into long-term
contracts for the building of large hospitals that we have no idea whether the
NHS will actually need. ...
"Every hospital I talk to wants the freedom to structure its borrowing
projects as they wish. For all too many, PFI has turned into a straitjacket.
Hospitals do not want to be locked into costly contracts which last into the
2040s. The NHS needs much greater flexibility when it secures borrowing from
the private sector.”
25 years very foolish
It is very foolish for any
organisation to contract to purchase services from a supplier for 25 years or
more. The threat that a contract is not going to be renewed is the most
effective lever an organisation has to ensure that services are delivered as
required. With a contract for 25 years or more, the supplier doesn’t need
to worry about that for a very long time.
It is even more foolish to take out
a long-term contract in circumstances where the services required cannot be
predicted accurately 25 months hence let alone 25 years hence. No doubt
PFI contracts normally prescribe a mechanism for the modification of the PFI
property and the services to be delivered in it, but the public body asking for
a modification is at the mercy of the PFI contractor that owns the property and
provides services in it. Nobody else can provide the services, and the
service has to be provided, so the public body is in a hopelessly weak
bargaining position when it comes to agreeing the extra cost to the taxpayer.
This is a direct result of the
public body taking out a contract for a service delivery for a period so long
that service needs cannot possibly be predicted. Why are public bodies
encouraged by the Treasury to engage in this foolishness? The answer is
that the inappropriately long service contract is dictated by the fact that the
PFI contractor has to borrow over a long period – 25 years or more – in order
to keep the cost of borrowing within reasonable bounds. To borrow over
that period, the consortium has to be guaranteed an adequate income stream
throughout the period in order to service the borrowing. So, there has to
be a contract for service delivery for 25 years or more, even though service
needs cannot possibly be predicted for anything like that length of time.
In other words, the inappropriately
long service contract is a necessary condition for getting unnecessarily
expensive finance for public projects via PFI. Gordon Brown has brought
the world of
Could it be that after 10 years of
silence about this absurdity the Conservatives are at last going to challenge
the Chancellor about it?
PFI is unnecessary for public sector
procurement. There is no need for a
public body to enter into a contract with a single private sector consortium to
(1) provide finance for a project, (2) undertake the building work, (3)
maintain the building, and (4) provide other services (for example, cleaning or
laundry) in the building for 25 years or more.
On the contrary, there are very good
reasons why the process should be broken into its separate elements. The state itself should acquire the finance,
since that represents best value for money for the taxpayer, and contract a
private company to construct the building.
Contracts for building maintenance and other services, if not carried
out by the public body itself, should be set for a period of time for which
service needs can be predicted, and certainly not for anything like 25 years.
Three
years is long enough
Of course, the Government is fully
aware that long term contracts for the supply of public services are not
wise. You have only to look on the Department of Education & Skills
website to confirm this. There you will find a Purchasing Guide for Schools [3] produced
by the Department’s Value for Money Unit, which contains the following good
advice in a section entitled “Contracts longer than three years”:
“Anything
that is longer than three years may result in inflexibility, particularly if
the agreement does not allow the school to vary its requirements in the light
of changing circumstances.”
This is written by the same Government
that forces public bodies across the land to take out contracts for 25 years
and more for services that may never be required.
There is a prime example of this in
the education sector in
(For details, see Belfast Telegraph articles by
So far as I am aware, the Belfast
Education & Library Board is still paying Northwin
for a 500-pupil school. It is difficult
to be sure about this because the Board, like other public bodies, refuses to
reveal PFI payments, which are deemed to be “commercial in confidence”.
Postscript
on IFFIm
On
As Evan Davies explained on BBC
Radio 4’s Today on the day of the
launch [6],
IFFIm is a scheme for borrowing money, by issuing
bonds repayable from future aid budgets, to pay for immunisation now. About a half a dozen other countries have
joined the scheme.
In a statement in advance of the
launch, the Chancellor said [7]:
“Recognising this
combination of strong moral purpose and the power to raise finance, His
Holiness Pope Benedict XVI, the Archbishop of Canterbury, the Chief Rabbi, the
Muslim Council of Britain, the Hindu Forum of Britain and the Network of Sikh
Organisations have agreed to buy the first six IFFIm
bonds. Anti-poverty campaigners Bono and Bob Geldof
will also buy bonds today.”
A worthy cause, if ever there was
one.
But, why go to the bother of setting
up this complicated scheme for borrowing money, when the Government could
borrow it in the conventional manner?
You’ve guessed it: the Office of National Statistics has declared
But what’s a few million pounds of
taxpayers’ money when it allows the Chancellor to bask in the reflected glory
of Bono - and the Pope?
Labour & Trade Union Review
www.david-morrison.org.uk
References:
[1] See www.conservatives.com
[2] See www.publications.parliament.uk
[3] www.dfes.gov.uk/valueformoney/docs/VFM_Document_15.pdf
[4] See www.belfasttelegraph.co.uk/
[5] www.iff-immunisation.org/index.html
[6] www.david-morrison.org.uk/other-documents/iffim-bbc-today-20061107.htm
[7] See www.hm-treasury.gov.uk