The Private Finance Initiative n Advantages * Benefits of the PFI The major appeal of the PFI for the government is that the cost of the hospital does not appear as an immediate lump sum payment in public expenditure. Also, the PFI may additionally: n n Create better incentives to perform, as payments are directly linked to the contractor's performance. n n Offer design improvements and lower construction costs. n n Lead to more cost-effective support services. n n Lead to more projects being completed on time, although the PFI may incur higher costs of borrowing. n n Yield better maintained hospitals. *Source: Office of Health Economics-John Sussex n The facts so far ** n n The costs of the PFI to taxpayers and patients are likely to be high n n The average increase in estimated cost from the 'outline business case' is 72%. n n The private finance initiative substantially increases the cost of hospital building. Total costs in a sample of hospitals built under the PFI are 18-60% higher than construction costs alone n n The new hospitals generally contain 20-40% fewer beds than those they replace. n n Over-budget PFI hospital schemes are being bailed out by taking money from community services. n n The costs of PFI contract negotiation have been estimated to be seven times higher than for traditional tendering. ** source: n What is a PFI n The Private Finance Initiative addresses the question of how we should finance the NHS and was introduced by the Conservative Government in 1992, with the primary objective being to encourage private investment in major public building projects, like schools, hospitals and roads. Private investment implies that the level of government borrowing falls and that risk is transferred from the public to the private sector. n A private sector consortium pays for a new hospital, where the consortium usually consists of a construction company, a bank or financier, a facilities management contractor and consultants. The local NHS trust then pays the consortium a regular fee for the use of the hospital, which covers construction costs, the rent of the building, the cost of support services and the risks transferred to the private sector. Thus, in essence most new NHS hospitals will be designed, built, owned and run by a consortium or grouping of companies. The NHS will employ some of the staff, mainly doctors and nurses and will rent the building and other facilities from the consortium for at least 25 years. The deal is constructed in such a way that the consortium is guaranteed a full return on costs including interest on the capital borrowed, plus an element of profit.

n Disadvantages *** n n The PFI is a more expensive way to finance new hospitals. It is a 'build now, pay more later' scheme. To pay for the building work, the private companies will have to borrow the money from banks at a higher rate of interest than government funded schemes. n n The private companies will need to make a profit on the scheme, so there is no scope for saving money on building costs, unless quality standards are allowed to fall. n n The PFI involves the private sector taking over the financial and operational risk of a hospital for which they charge a price. n n The costs of the first schemes have been far in excess of what was budgeted. Thus, with PFI contracts guaranteed for 25 years or more, any future savings in the NHS will have to come from other services. n n Low staff morale due to poor working conditions can lead to poor quality health care provision n n In the long run the consortia will push for all staff - including the doctors and nurses - to be employed by private companies. n n Service planning will be distorted as:   Hospital services will be planned by private companies, which may result in reduced bed numbers, if this is more profitable!   Companies will want to build big new hospitals to make big profits and will be less keen to build small, locally accessible community services. n n Community services will lose out as the PFI locks the NHS into paying for new super-hospitals for at least 25 years. n n Democracy will be impossible, since PFI schemes are shrouded in secrecy. *** source: and BMA website. n Alternatives to the PFI n Government borrowing and taxation.The traditional method of paying for new hospitals - through government borrowing - remains the cheapest and best. A high quality, cost-effective, appropriate and accountable health service can only be financed properly through taxation. 1 Increased allocation of Public funding to the NHS. One of the original purposes of the PFI was as a means of reducing public sector borrowing. This is no longer the imperative it once was, in view of the improved state of the economy and also changes in accounting rules. On the basis of this, there is a main alternative to the PFI, namely increased allocation of public funding to the NHS to finance building projects. It is acknowledged that capital has been allocated, not only to build new hospitals but also to update facilities in a number of NHS hospitals. There is no reason however why the level of funding available to the NHS should not be increased still further to allow a much higher proportion of the Government's ambitious hospital building programme to be funded from public money. This would allow evidence of likely future patterns of need for care to be taken fully into account rather than the NHS being dictated to by the economic imperatives of PFI projects. 1 Source: Office of Health Economics -John Sussex