PFI has been a wasteful way to build new hospitals, says studyResearch shows millions of pounds could be saved and spent on public healthcare if the government buys its way out of PFI contracts.
As much as £2.4bn could be saved if the NHS bought out the private finance contracts signed by the government to build new hospitals, an economic study has claimed.
Labour’s enthusiasm for public finance initiatives (PFIs) has wasted national reserves and enriched private investors, the report by a University of East Anglia academic alleges.
Dr Chris Edwards’s investigation focuses on one of the earliest PFI contracts agreed, for the 987-bed Norfolk and Norwich University hospital (NNUH).
The refinancing of the NNUH contract has already been the subject of a critical report by the public accounts committee, which commented on “the unacceptable face of capitalism in the consortium’s dealings with the public sector”.
Edwards calculates a new figure of how much could be saved – £217m, he says – if the Norwich hospital contract were bought out from the private company that originally financed the deal.
Hospitals built under PFI contracts are financed by private companies that rent them back to the NHS over long periods, generally more than 30 years.
The advantage for the Treasury was that the sums did not appear on the government’s borrowing liabilities. Critics, however, claimed it was like buying a house on a credit card rather than with a mortgage.
Edwards, who has now retired from lecturing but remains a fellow at UEA, estimates that between May 1997 and November 2008, £6.1bn was spent on building hospitals in England. Over two-thirds of that figure, he says, was contracted under PFI terms. More PFI hospitals are still under construction.
The £2.4bn saving he identifies is based on a national extrapolation made from the savings he claims could be made by cancelling the NNUH contract. His figures, he says, take into account penalty clauses that would have to be paid.
“The Labour Party came to power [when] the electorate was perceived as not wanting to pay higher taxes [but] demanding improved public services,” his report states.
“PFI was attractive to New Labour because it seemed to offer a way of funding public sector investment without raising income tax or public sector borrowing, while also promoting the private sector.
“Gordon Brown, [as] chancellor of the exchequer, adopted two fiscal rules: one was the so-called golden rule of matching current government revenue with current expenditure over the economic cycle; the second was to keep the public debt-to-GNP ratio below 40%.
“Investment under the PFI was seen to be useful to the second rule even though, over the long-term, it was likely to threaten the first.”
Edwards concludes: “Obviously each hospital needs to be looked at in detail. However, looking at 53 PFI hospitals, and assuming the same saving as the NNUH, the total savings from buying them out would amount to about £2.4bn.”
The cost of building the Norwich hospital in the late 1990s, Edwards says, was £159m. The health authority, however, is committed to paying £832m in rent up until the year 2037. Even discounting future prices to today’s equivalent and paying a £300m break penalty, he estimates the saving would still be £217m.
Adrian Ramsay, the deputy leader of the Green Party and local parliamentary candidate, has supported Edwards’s findings. The party has pledged to buy back PFI contracts.
“This is a financial scandal,” Ramsay said. “Millions of pounds that should have been spent on public healthcare has gone into the deep pockets of finance companies.
“Financing new hospitals with PFI has been immensely wasteful. I’m angry at the short-sightedness of the Labour and Conservative politicians who set up this and other PFI deals. PFI has provided a poor deal for taxpayers and a poor deal for the NHS.”
A spokesman for the NNUH said: “We have a world-class hospital built on budget and on time, which is well maintained and operating well. This report contains nothing new and all of the issues were considered in detail by the National Audit Office.”
A spokesman for Octagon Healthcare Ltd, the company that financed the NNUH PFI deal, said that he could not comment further until the full report was studied.