PFI hospitals are “lunacy”, says Conservative Party


Strange things are happening in the Conservative Party.  On 27 October 2006, Health spokesman, Andrew Lansley, made a full-blooded - and well-directed - attack on Labour’s massive hospital building programme using the Private Finance Initiative (PFI).


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 Alice in Wonderland to the provision of public services.


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 Northern Ireland.  In October 2000, the Belfast Education & Library Board signed a 25-year contract with a private consortium called Northwin for the provision of, inter alia, a school to accommodate 500 pupils.  The school - Balmoral High School - was opened in 2002, but in 2004 it had less than 300 pupils and today it has about 200.


(For details, see Belfast Telegraph articles by David Gordon (1) Building double the size needed as numbers drop on 14 October 2004 and (2) Land sell-offs now under scrutiny in schools shambles on 17 July 2006 [4]).


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 7 November 2006, the Chancellor launched the International Finance Facility for Immunisation (IFFIm) [5].  This is the Chancellor’s brainchild for providing funds for immunisation of children in the world’s poorest countries.  It will provide about $4 billion over 10 years for the Global Alliance on Vaccines and Immunisation.


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 Britain’s portion of the IFFIm debt to be off balance sheet, even though the state has guaranteed that it will pay back the debt with interest.  Furthermore, it will cost the British taxpayer more to take the IFFIm route than the conventional route.  Sounds familiar.


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?



David Morrison

18 November 2006

Labour & Trade Union Review



[1]  See

[2]  See


[4]  See



[7]  See