Is the private finance initiative dead?
It may have failed in the United Kingdom, but that won't stop it being exported
For health professionals working in hospitals that had been starved of investment for decades, often in buildings that were crumbling around them, the United Kingdom's private finance initiative (PFI) must have seemed like a dream come true. Rather than finding the money up front to rebuild hospitals, managers could enter into a contract with a private company or a consortium to finance the building and guarantee that the facilities would be maintained long into the future. In turn the hospital trust would pay an annual fee to cover the costs of financing the project (adjusted for the risk assumed by the private company) and of maintenance. Suddenly it became possible to escape the constraints imposed by buildings that, in many cases, had been designed to meet the needs of the population a century earlier.
The initial enthusiasm by many hospital boards was easy to understand, as the Department of Health made it clear that this was the only way to fund big capital developments. Yet from the inception of this initiative in the NHS there have been voices of caution, most notably Professor Allyson Pollock who, as a consequence, has suffered personalised attacks by those advocating PFI.1 One of the potential drawbacks to which Professor Pollock drew attention was that the new facilities funded through PFI almost invariably provided less capacity than those they were intended to replace.2 Another was that the contracts were extremely expensive (or seemed to be, given that they were shrouded in commercial secrecy) and were not supported by convincing economic arguments.3
Recent developments suggest that the experimental use of PFI in funding health care in the United Kingdom may be coming to an end. The first is the abandonment of the flagship west London development, which sought to create an important new teaching hospital complex by merging several specialist hospitals. There are many reasons for the failure of this project. But, overall, it was simply too complicated for a health system in which—in the name of local responsiveness—those responsible for purchasing care (along with other interested parties) have become hopelessly fragmented. This has many implications. Perhaps the greatest is the question of how the NHS, meant to be led by primary care in future, can hope to develop a substantial programme of capital investment.
The second sign that political enthusiasm for PFI may be waning is the recognition of the initiative's true costs to the NHS and to contractors. The House of Commons Public Accounts Committee has drawn attention to the large profits made by the private contractor which built the Norfolk and Norwich hospital.4 The high transaction costs of bidding for contracts are, however, driving many potential contractors out of the market.5
The fundamental flaw at the heart of the PFI scheme is its lack of flexibility. As the pace of change in the delivery of health care becomes ever faster, managers should think twice about signing long term contracts that would levy heavy penalties for even minor changes in building projects. Indeed, one senior NHS manager has argued that new hospitals should have an anticipated lifetime of only 5-10 years.6 Such short term contracts are unlikely to interest private investors, unless they are accompanied by very high premiums.
The most serious threat, however, may be one that few people had anticipated. The UK government has set itself two fiscal rules. The first is that over the economic cycle it should not borrow to cover current spending. The second is that net debt should not exceed 40% of the gross domestic product. The first, known as (Chancellor of the Exchequer) Gordon Brown's "golden rule," differentiates between current spending and capital spending. The Treasury recognises that the government has a duty to maintain the level of investment required to meet the economy's needs and to ensure that the public capital stock is kept in good condition to maintain competitiveness and sustain public services.7 The second fiscal rule makes no distinction between borrowing for current spending and borrowing to finance investment. Net debt is now around 35% of gross domestic product, projected in the budget in March 2005 to rise to 37% by 2008, assuming that projected economic growth will be achieved.
The Financial Times published an article this spring suggesting that the Office for National Statistics (ONS) was about to reclassify PFI projects.8 Although ONS issued a rebuttal, stating that it "has not taken any decision to change the treatment of Private Finance Initiative schemes in the public finances" as "the element of PFI debts that should be recorded within Public Sector Debt, is an extremely complex and difficult matter," it acknowledged that "ONS has recognised for some time that estimates need to be made and we have been continuously expanding our ability to cover PFI activities and explore possible sources of information."9
This is important because funds for PFI are treated as "off balance sheet" financing and appear as "additional expenditure" to public sector expenditure and are not currently included in the government balance sheet calculations of net debt. Should the Office for National Statistics change the rules, a major component of capital spending under these contracts could be reclassified as debt. This could easily lead to a breach of the second rule, removing the main justification for the PFI model.
If the private finance initiative dies in the United Kingdom it may still have a life beyond these shores. Rather like general practice fundholding, it has created a cadre of experts who can now offer their services to the rest of the world. The United Kingdom may, once again, be at least as successful in exporting its failures as its successes.
BMJ, 2005;331:792-793 (8 October), doi:10.1136/bmj.331.7520.792
Rifat A Atun, director
For health professionals working in hospitals that had been starved of investment for decades, often in buildings that were crumbling around them, the United Kingdom's private finance initiative (PFI) must have seemed like a dream come true. Rather than finding the money up front to rebuild hospitals, managers could enter into a contract with a private company or a consortium to finance the building and guarantee that the facilities would be maintained long into the future. In turn the hospital trust would pay an annual fee to cover the costs of financing the project (adjusted for the risk assumed by the private company) and of maintenance. Suddenly it became possible to escape the constraints imposed by buildings that, in many cases, had been designed to meet the needs of the population a century earlier.
The initial enthusiasm by many hospital boards was easy to understand, as the Department of Health made it clear that this was the only way to fund big capital developments. Yet from the inception of this initiative in the NHS there have been voices of caution, most notably Professor Allyson Pollock who, as a consequence, has suffered personalised attacks by those advocating PFI.1 One of the potential drawbacks to which Professor Pollock drew attention was that the new facilities funded through PFI almost invariably provided less capacity than those they were intended to replace.2 Another was that the contracts were extremely expensive (or seemed to be, given that they were shrouded in commercial secrecy) and were not supported by convincing economic arguments.3
Recent developments suggest that the experimental use of PFI in funding health care in the United Kingdom may be coming to an end. The first is the abandonment of the flagship west London development, which sought to create an important new teaching hospital complex by merging several specialist hospitals. There are many reasons for the failure of this project. But, overall, it was simply too complicated for a health system in which—in the name of local responsiveness—those responsible for purchasing care (along with other interested parties) have become hopelessly fragmented. This has many implications. Perhaps the greatest is the question of how the NHS, meant to be led by primary care in future, can hope to develop a substantial programme of capital investment.
The second sign that political enthusiasm for PFI may be waning is the recognition of the initiative's true costs to the NHS and to contractors. The House of Commons Public Accounts Committee has drawn attention to the large profits made by the private contractor which built the Norfolk and Norwich hospital.4 The high transaction costs of bidding for contracts are, however, driving many potential contractors out of the market.5
The fundamental flaw at the heart of the PFI scheme is its lack of flexibility. As the pace of change in the delivery of health care becomes ever faster, managers should think twice about signing long term contracts that would levy heavy penalties for even minor changes in building projects. Indeed, one senior NHS manager has argued that new hospitals should have an anticipated lifetime of only 5-10 years.6 Such short term contracts are unlikely to interest private investors, unless they are accompanied by very high premiums.
The most serious threat, however, may be one that few people had anticipated. The UK government has set itself two fiscal rules. The first is that over the economic cycle it should not borrow to cover current spending. The second is that net debt should not exceed 40% of the gross domestic product. The first, known as (Chancellor of the Exchequer) Gordon Brown's "golden rule," differentiates between current spending and capital spending. The Treasury recognises that the government has a duty to maintain the level of investment required to meet the economy's needs and to ensure that the public capital stock is kept in good condition to maintain competitiveness and sustain public services.7 The second fiscal rule makes no distinction between borrowing for current spending and borrowing to finance investment. Net debt is now around 35% of gross domestic product, projected in the budget in March 2005 to rise to 37% by 2008, assuming that projected economic growth will be achieved.
The Financial Times published an article this spring suggesting that the Office for National Statistics (ONS) was about to reclassify PFI projects.8 Although ONS issued a rebuttal, stating that it "has not taken any decision to change the treatment of Private Finance Initiative schemes in the public finances" as "the element of PFI debts that should be recorded within Public Sector Debt, is an extremely complex and difficult matter," it acknowledged that "ONS has recognised for some time that estimates need to be made and we have been continuously expanding our ability to cover PFI activities and explore possible sources of information."9
This is important because funds for PFI are treated as "off balance sheet" financing and appear as "additional expenditure" to public sector expenditure and are not currently included in the government balance sheet calculations of net debt. Should the Office for National Statistics change the rules, a major component of capital spending under these contracts could be reclassified as debt. This could easily lead to a breach of the second rule, removing the main justification for the PFI model.
If the private finance initiative dies in the United Kingdom it may still have a life beyond these shores. Rather like general practice fundholding, it has created a cadre of experts who can now offer their services to the rest of the world. The United Kingdom may, once again, be at least as successful in exporting its failures as its successes.
BMJ, 2005;331:792-793 (8 October), doi:10.1136/bmj.331.7520.792
Rifat A Atun, director
References
Carvel J. MPs reject attack on PFI in health service. 15 May 2002. http://society.guardian.co.uk/privatefinance/story/0,8150,715778,00.html (accessed 26 Jun 2005)
Gaffney D, Pollock AM, Price D, Shaoul J. NHS capital expenditure and the private finance initiative: expansion or contraction? BMJ 1999;319: 48-51.
Pollock AM, Dunnigan M, Gaffney D, Macfarlane A, Majeed FA, on behalf of the NHS Consultants' Association, Radical Statistics Health Group, and the NHS Support Federation. What happens when the private sector plans hospital services for the NHS: three case studies under the private finance initiative. BMJ 1997;314: 1266-71.
National Audit Office. The refinancing of the Norfolk and Norwich PFI Hospital. London: NAO, 2005. (HC 78, 2005-06.)
Jarvis secures refinancing deal. 31 January 2005. http://news.bbc.co.uk/2/hi/business/4221709.stm (accessed 26 June 2005).
Harding M-L. Trusts should ditch `monuments'. Health Serv J 2005 Jun 9: 6.
HM Treasury. Economic and fiscal strategy report 1998: long term stability and investment. London: Stationery Office, 1998. (Cm 3978.) www.archive.official-documents.co.uk/document/cm39/3978/stab.htm (accessed 29 Sep 2005).
Giles C. Debt move narrows Brown's options. Financial Times 2005 May 20. http://news.ft.com/cms/s/41a61fc2-c8a6-11d9-87c9-00000e2511c8.html (accessed 25 Jun 2005).
National Statistics. Letters to the press: private finance initiative. (Letter to Financial Times 20 May 2005). www.statistics.gov.uk/press_release/letters/FT_20may05.asp (accessed 25 Jun 2005).
Carvel J. MPs reject attack on PFI in health service. 15 May 2002. http://society.guardian.co.uk/privatefinance/story/0,8150,715778,00.html (accessed 26 Jun 2005)
Gaffney D, Pollock AM, Price D, Shaoul J. NHS capital expenditure and the private finance initiative: expansion or contraction? BMJ 1999;319: 48-51.
Pollock AM, Dunnigan M, Gaffney D, Macfarlane A, Majeed FA, on behalf of the NHS Consultants' Association, Radical Statistics Health Group, and the NHS Support Federation. What happens when the private sector plans hospital services for the NHS: three case studies under the private finance initiative. BMJ 1997;314: 1266-71.
National Audit Office. The refinancing of the Norfolk and Norwich PFI Hospital. London: NAO, 2005. (HC 78, 2005-06.)
Jarvis secures refinancing deal. 31 January 2005. http://news.bbc.co.uk/2/hi/business/4221709.stm (accessed 26 June 2005).
Harding M-L. Trusts should ditch `monuments'. Health Serv J 2005 Jun 9: 6.
HM Treasury. Economic and fiscal strategy report 1998: long term stability and investment. London: Stationery Office, 1998. (Cm 3978.) www.archive.official-documents.co.uk/document/cm39/3978/stab.htm (accessed 29 Sep 2005).
Giles C. Debt move narrows Brown's options. Financial Times 2005 May 20. http://news.ft.com/cms/s/41a61fc2-c8a6-11d9-87c9-00000e2511c8.html (accessed 25 Jun 2005).
National Statistics. Letters to the press: private finance initiative. (Letter to Financial Times 20 May 2005). www.statistics.gov.uk/press_release/letters/FT_20may05.asp (accessed 25 Jun 2005).
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