PFI: Lessons from the UK NHS

• PFI is now a discredited Public Policy throughout public sector

• Affordability• VFM

• Cost of finance

PrestonMarch2013 1

Public Expenditure Rules

• Efforts to meet fiscal rules at national and European level may have contributed to misuse of PFI

• Lack of capital and Departmental Expenditure Limits … have encouraged and may encourage poor investment decisions…

……Treasury Committee 2011

PrestonMarch2013 2

Treasury Committee report Aug 2011

• Main benefit claimed was transfer of construction cost risk . However in a PFI contract which lasts 30 years it is not necessary to transfer that risk

• We are concerned that VfM appraisal system biased to favour PFI

• Some of claimed risk transfer may also be illusory

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• “The involvement of private finance in taking on performance risk is crucial to the benefits offered by PFI, incentivising projects to be completed on time and on budget, and to take into account the whole of life costs of an asset in design and construction.”

• HM Treasury. PFI: meeting the investment challenge July 2003

Treasury Committee 2011

No convincing evidence ..that PFI projects are delivered more quickly and at lower out- turn costs than projects using conventional procurement methods. .

Increase in private finance costs mean that PFI financing method is now inefficient

PrestonMarch2013 5

PFI Issues

• Affordability problems come home to roost.

• Risk transfer argument is now being treated with scepticism i.e. the policy is seen to be political not economic.

• Banking crisis is driving reform (because bank lending has dried up). But it is reform not abolition -search is on for alternative means of passing risks on to service users.

PrestonMarch2013 6

• Public Expenditure Rules: Golden Rule (borrow to invest) sustainable investment rule: public debt < 40% GDP- now abandoned)

• Treasury tests: – Affordability – Value for Money

PrestonMarch2013 7

PrestonMarch2013

£191.3 billions

£34.7 billions

Capital value and unitary payments for signed PFI projects in Northern Ireland, England and Wales (1990-2008; n=500)

-8000

-6000

-4000

-2000

0

2000

4000

6000

800019

90

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

2023

2026

2029

2032

2035

2038

2041

2044

2047

years

£m

Capital value in £m Total unitary charge in £m

£34.7 billions £191

billions

Source: HM Treasury (2008). Signed Projects List (March 2008). Available at: http://www.hm-treasury.gov.uk/ppp_pfi_stats.htm (Accessed: 24 November 2008).

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PrestonMarch2013 9

Loss of Monitoring the true costs of PFI

• Data issues

• 1. No account of additional contributions to PFI schemes - land sales and receipts, NHS capital, Treasury “smoothing mechanisms”

• 2. PFI payments not broken down by sector• 3. PFI payments do not provide split between FM

and availability - therefore disguise true cost of capital

• 4. Inconsistent definitions of PFI estimates of capital (capital not defined)

• 5. Revisions to contracts and payments not provided

NHS Hospitals

• 159 PFI hospitals• Capital value 13.6 billion (2009-10)

• Aggragate of all PFI availability payments is 42.8 billion (2009-10) , service charges 30.7 billion (2009-10)

PrestonMarch2013 10

Organising principles of NHS

•Public health systems and services : geographic populations, comprehensive. Administrative Integration and block grants. Capital budgets

•Market systems: individuals and groups of individuals, operate by risk selection and risk allocation which is managed through a commercial contract and a pricing mechanism which reflects risks ex ante

PrestonMarch2013 11

Capital programmes in the NHS:

switch to PFI • Buildings and Assets converted into a stream of services: charge on capital

• Changes to accounting regime• Lease payments (interest and PDC) • Revenue substitute for capital• Payments for capital substitute for labour

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PrestonMarch2013 13

Annual revenue implications of capital costs for 19 PFI hospital schemes comparing costs before and in the first year in which the PFI scheme is

operating: ring fenced charges

12.45.3Worcester Royal Infirmary

12.56.2University College London Hospitals*

12.88.3The Dudley Group of Hospitals*

13.13.4Calderdale Healthcare

13.25.6South Tees Acute

14.63.8Hereford Hospitals

14.74.0Carlisle Hospitals

15.59.3West Middlesex University Hospital*

16.22.1Greenwich Healthcare

16.43.8Swindon & Marlborough

32.76.7Dartford & Gravesham

After PFI (Capital charges + Availability

fee as % of projected income in 1st year of

operations)

Before PFI (Capital charges as % of income 1998-9)

NHS Trust

All calculations include payments to Treasury on existing and retained estate. * Refers to 1999-2000

PrestonMarch2013 14

PrestonMarch2013 15

Changes in bed numbers at NHS trusts under PFI development Values are average

no’s of beds available daily (all specialties)

(-30.8) (-5.2)Percentage change from 1995-965,5837,6348,063Total

484566660Greenwich

465507506Carlisle

250384397Hereford Hospitals

535732745South Buckinghamshire

390699697Worcester Royal Infirmary

7361,2381,342South Manchester

8091,0081,120Norfolk & Norwich

454597665North Durham Acute Hospitals

400506524Dartford & Gravesham

553772797Calderdale Healthcare

507625610Bromley Hospitals

Planned1996-971995-96Trust

PrestonMarch2013

Loss of control over planning

‘Unattractive economics’“An incremental investment of £200m might require productivity improvements leading to perhaps 1,000 job losses which might be significantly greater than 25% of the workforce … [This] is probably only achievable by reducing the numbers of doctors and nurses … in the local health care market.”

PFI Futures March 1998Newchurch & Co

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• “There is a cost to the Government’s use of private finance, involving the extra cost of the private sector securing funds in the market, but a great part of the difference between the cost of public and private finance is caused by a different approach to evaluating risk.”

• HM Treasury. PFI: meeting the investment challenge July 2003

Affordability problems deepen

• Indexation

• Interest rate swaps• Inflation swaps

PrestonMarch2013 18

The Risk Premium

• Value for money and Risk transfer

•

PrestonMarch2013 19

Commercial contracts

• “Contracts [….] have an important function in specifying the risk-sharing arrangements that apply in the face of unplanned events on either the purchaser or the provider side. In short, contracts are a means of steering transactions and sharing or allocating risk.”

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PrestonMarch2013 21

• “We have sought on a number of occasions to gain an understanding of the relationship between the returns which contractors earn from PFI projects and the risks they actually bear. At present the available information is limited and rather mixed…”

• Select Committee on Public Accounts. PFI construction performance. 35th

report, session 2002-03

PrestonMarch2013 22

• The value is defined as follows:

• “An ‘expected value’ provides a single value for the expected impact of all risks. It is calculated by multiplying the likelihood of the risk occurring by the size of the outcome (as monetised), and summing the results for all the risks and outcomes.”

• HM Treasury. The Green Book. Appraisal and evaluation in central government

2003

PrestonMarch2013 23

PFI and risk?

• The Treasury defines risk as the “likelihood, measured by its probability, that a particular event will occur.”

•HM Treasury. The Green Book.

Appraisal and evaluation in central government 2003

PrestonMarch2013 24

The contractual structure of PFI deals

Constructioncontractor

Facilities mgmt

(FM) operator

Carried outunder contract

Debtfinance

Unitary chargepayment

Equity and sub debt finance

Servicesdelivered in return for annual charge

Specialpurposevehicle

Procuringauthority

,and

ongoingusers ofpublicservices

Debtinvestor

3rd party equityinvestor

Facilities mgmt(FM)

investor

Construction

investor

PrestonMarch2013 25

How PFI contracts obscure the audit trail

• PFI contracting makes it difficult to identify who bears risk

• PFI firms are shell companies that do not bear risk but pass it on to others through sub-contracts

• The main providers of private finance are heavily protected from risk

• Commercial confidentiality used to conceal contracts

Treasury Committee report Aug 2011

• Main benefit claimed was transfer of construction cost risk . However in a PFI contract which lasts 30 years it is not necessary to transfer that risk

• We are concerned that VfM appraisal system biased to favour PFI

• Some of claimed risk transfer may also be illusory

PrestonMarch2013 26

Loss of control over taxpayer funds

• Redistribution of funds and Redistribution of service

• Needs of banks and equity investors determine shape of health services and ultimately the end of the NHS and switch to user charges

PrestonMarch2013 27

PrestonMarch2013

Source: Response to Scottish Futures Trust Consultation Paper by Jim Cuthbert & Margaret Cuthbert

March 2008

www.cuthbert1.pwp.blueyonder.co.uk/

Projected Dividends on Six PFI Projects

Equity Input(£m)

ProjectedDividends

(£m)

New Royal InfirmaryEdinburgh

0.5 167.9

Hairmyres Hospital 0.0001 89.14

Hereford Hospital 0.001 55.671

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PrestonMarch2013 glasgow sep 29th 2010

Export of PPPs / PFI to Africa

The Governments of South Africa, Uganda, Botswana, Tanzania, Mozambique, Nigeria, Kenya, Egypt, Senegal, Morocco, Malawi and Mauritius are all at various stages of setting up specialist units to promote greater use of PPPs and pFI in infrastrucure.

Source: The Infrastructure Consortium for Africa: Annual Report 2007.(The ICA was launched by the G8 in 2005. Members are amongst others the G8 countries, the World Bank Group, the African Development Bank, the European Commission and the European Investment Bank.)

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“Portugal: one of largest PPP programs in the world, cumulative investments about 20 percent of current GDP, or about 13 percent of GDP of depreciated investments.

PrestonMarch2013 30

• Council of Ministers by end-March 2012 will significantly enhance the role of the MoF in managing PPPs at all stages of a project life-cycle. In order to increase transparency, all PPP contracts are now publicly available (except documents subject to confidentiality clauses).]

PrestonMarch2013 31

WHO ALMA ATA

• · equitable distribution of income, access to public health care services for all, and primary health care reinforced by secondary and tertiary services;

• · an education system accessible for all, particularly at primary level, with possibility to continue to secondary and tertiary levels;

• · food security and adequate nutrition for all levels of society.” (History of international health)

PrestonMarch2013 32

• The primary determinants of disease are mainly economic and social, and therefore its remedies must be economic and social

• G Rose in ‘Strategy of Preventive Medicine’ OUP 1992

PrestonMarch2013 33

‘The abolition of want before the war was easily within the economic resources of the community: want was a needless scandal due to not taking the trouble to prevent it.’

Beveridge, 1942

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‘The aim of this plan for Social Security and allied services is to abolish want by ensuring that every citizen willing to serve according to his powers has at all times an income sufficient to meet his responsibilities. Social insurance, children’s allowances and allied services, eg, health, education and housing are primarily methods of redistributing wealth.’

Beveridge, 1942

PrestonMarch2013 36

Health and Social Care Act 2012

• Abolishes the NHS in England• End of Duty on Sec of State to secure and provide health care for all

• New discretionary powers for providers to determine what services are provided and what will be charged for

PrestonMarch2013 37

Markets work by Risk Allocation

• Risk disaggragation• Risk identification • Risk prediction • Risk pricing: the PREMIUM the market charges for bearing the risk

• Risk transfer through commercial contract

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PrestonMarch2013 39

Service unbundling: Disaggragating risk

UK NHS

pharmaceuticals -services

dentistry

ophthalmology

long term care

ancillary services - eg, catering

cleaninglaundry

PFI infrastructurehospitalspremisesbuildings

maintenance

‘soft’ clinical services - pathologyradiology

medical records

GPsnurses &doctors

clinical &non-clinical -equipment