PFI…private finance initiative..or…pretty f***ing iniquitous

Forest Gump
Jul 27, 2017 · 9 min read

PFI

The NHS will be one of the big topics at the next election, along with Brexit and immigration. So why is it that so many people have no idea about one of the biggest issues facing the NHS?

If you think there’s no money for NHS funding you’d be right-PFI has sucked it dry, screamed one headline.

http://www.independent.co.uk/voices/nhs-funding-pfi-contracts-hospitals-debts-what-is-it-rbs-a7134881.html

PFI should be the one of the biggest issues at the forthcoming election. We voted for Brexit because we are angry at the political and financial establishments in the shadow of the 2008 financial crash.

The financial and banking system that got us where we are today, with austerity inflicted on the innocent while the guilty are bailed out and further enriched with our tax money ought to be the target of our wrath.

So why does the public not put two and two together and see the connection? PFI is the epitome of the evil of big finance. And yet nobody seems to be bothered by it. No political party has much to say about it and no major newspaper has properly taken up the cause.

The National Health Service is a sacred cow in the UK. It was hard won after two world wars. The welfare state was what the people deserved and wanted. Of all the social services Health is the one that generates the most consensus. We all love our NHS and were brought up believing that it is our crowning achievement and the envy of the world.

Free healthcare for all at the point of delivery.

The NHS is a very successful organization if judged by all the available metrics (*) It is generally a very good if not the best health service. Compared to all other major European countries we spend about three quarters of the amount of GDP on it. So it is a highly efficient system.

The American system on the other hand is mainly private rather than nationalized and costs twice as much. The quality is good but there is iniquity and it is far too expensive.

Currently the Republican administration is hell-bent on dismantling Obamacare which was a brave attempt at dealing with this iniquity. (The Republicans prefer Medicare and Medicaid, the previous systems tasked with providing health care for the 30 million or so uninsured.)

President Obama wanted Don Berwick to run Obamacare. Berwick is widely regarded as something of a guru of health care strategy, but an obstructive Congress vetoed his appointment. His great crime in the eyes of many in Congress was saying that the NHS was an excellent model for a health care system.

The great ideological fault-line is nationalized versus private. In the USA nationalized means Socialism and that is almost as bad as Communism.

In Europe we generally have a less binary viewpoint. However for the past 30 or so years the Neoliberal Capitalist consensus has been pushing towards privatization.

Then came the great financial crash of 2008. The Washington consensus is no longer supreme but as yet there are no convincing challengers to free market neoliberalism.

Goldman Sachs famously described as ‘the great vampire squid on the face of humanity’ created the world financial system which so spectacularly failed in 2008. Amazingly they were then brought in by the American government to fix it.

The harsh fact of life is that with Globalization power is no longer in the hands of governments. The Markets now dictate terms to governments. That is why in Europe we have austerity. It is also why in the UK we have PFI. The explanation for this will come later.

So what exactly is the Private Financial Initiative? PFI is the way the UK government currently funds major infrastructure projects such as schools, hospitals, roads and bridges.

Instead of dipping into state coffers for the billions required, instead government subcontracts the procurement to the private sector.

The explanation of how this works can be complicated or simple, so looking at the simple version…

If a government needs to raise billions of pounds to spend on hospitals it sells bonds to investors. Currently the interest payment on government bonds is around 2%. With PFI the cost is 7%.

Would any sane person take out a mortgage on a house at 7% rather than 2%? Obviously not, because over the 25 year repayment period they would have to pay £3,500 a month instead of £1,000.

Well that is precisely the position that some hospital trusts have been forced into in order to build new hospitals.

The complicated version of how it all works and the pros and cons and nuances can wait till later but let us just run with the simple explanation and run through the real life consequences of PFI.

The Royal London Hospital is a very good example. It is one of a group of five hospitals run by Barts Health. BH is the biggest trust in the NHS. It comprises the RLH, Barts, Whipps Cross, Newham and Mile End.

The old RLH opposite Whitechapel tube station was old and no longer fit for purpose.

In 2014 the new PFI-built RLH opened. This was a billion pound project (actually £200 million of that was spent on an upgrade to St Bartholomew’s as part of the deal.)

Skanska-Carillion, a giant consortium, got the contract not only to build the hospital but also to run it. These are two distinct things. If you spend a billion on a new hospital and have to repay 7% a year it means you have to pay £70 million a year on the mortgage. (the actual annual repayment may be as high as £120 million)

On top of that you either have to run the estate yourself or pay someone else to do it. The estate means maintenance, window cleaning, security, laundry, car parks, etc.

Outsourcing that to the same conglomerate that built the hospital has some obvious merits. But the whole business has some very obvious flaws too.

Paying three and a half times over the odds on a mortgage means that you are financially f***ed for the next 25 years. In the case of the RLH this period has been extended to 35 years. That is bad enough, but the subcontracted estate management contract has a whole series of unintended consequences.

Perhaps the most serious one is that the process of healthcare is rapidly changing as new technologies impact. It is also subject to the political movement of the tectonic plates operating above hospital trust level. Hospitals thus need to be flexible.

However the PFI estate management contract makes this prohibitively expensive. If it costs £300 to change a lightbulb then what about retro-fitting an out-patient clinic room into a minor operations theatre?

An OT ideally requires a ceiling mounted light. This costs around £3,000 to buy, but £10,000 to fit. This is because you have to rip the ceiling out, fit an RSJ girder to support the weight then patch up the ceiling.

The estate managing company has absolutely no incentive to do this job. However it will happily quote some ridiculous figure for the cost knowing that it has the hospital over a barrel. So instead of the job costing £13,000 it might quote £39,000.

Multiply this cost principle across the hospital over 35 years and the real cost of PFI estate management becomes obvious.

Let us go back to the RLH and look at some of the problems. The original design included a fancy glass atrium with trees, shops and communal space. Where is it? It also included a second helipad for the air ambulance. Where is that?

The top two and a half floors of the hospital remain empty; just bare concrete floors and walls. How did that happen?

A walk round the site reveals many other examples of bad design. Where is the car park? Why is the access road into A&E a postage stamp sized cul de sac? Why build a twin tower hospital spanning a road when there is ample ground adjacent to the north tower to allow a single footprint?

The builders and designers neglected to build a new Oxygen plant assuming the one from the old hospital would suffice. When the new hospital opened the first patients to be moved in were the sickest. The patients in the Intensive Care Unit of the old hospital were transferred one by one across the special elevated temporary walkway to the new ITU. Everything went swimmingly well until about half of the patients had been moved. Suddenly and precipitously at around 2 am., all the alarms went off on the patient monitoring systems.

The too small diameter, excessively long underground pipe, connecting the decades old oxygen plant to the new hospital, simply wasn’t capable of delivering the necessary flow. The result was a very expensive emergency patch up job and a hastily conceived modern oxygen plant right next to the side of the new hospital. Whether this potential bomb actually meets health and safety standards is open to debate. Every other modern hospital builds its oxygen plant a safe distance away.

It is not unusual for major infrastructure procurement projects to run late and over budget. But these are the very risks that PFI was supposed to pass on to the private sector. In fact this was the main selling point used by the advocates of PFI.

Cutting back on the original specifications may be necessary if you build your own house and run out of money but how is this allowed in a PFI build?

The whole idea of putting a billion pound procurement project into the hands of a failing NHS Trust is extraordinary.

It seems that the whole PFI mechanism is flawed, with no quality control, oversight, or public accountability.

It is hard to understand the logic of PFI, which was supported by both sides of the political divide. It was initiated by John Major’s government and then vastly expanded under New Labour. Both parties also supported creeping privatization of the NHS.

The total UK PFI debt is £300 billion for projects worth only £55 billion. The NHS has more than 100 PFI hospitals costing £80 billion but worth only £11.5 billion. How is this financial lunacy explained and why do the great unwashed not seem to care?

The Independent article quoted at the beginning includes the following…

Innisfree, a small finance company based in the City of London, is one of the biggest players in the PFI market. One of Innisfree’s flagship projects is the largest NHS PFI scheme at St Bartholomew’s and the Royal London hospitals in London. This could have been publicly financed for around £1bn; instead, it will end up costing £7bn by the time repayments are complete in 2049. The difference of £6bn will go to PFI consortium Skanska Innisfree and partners. To put these figures into a more digestible format, Barts is paying over £2m a week in interest, which adds up to over £120m a year, before they see a single patient.

Sorry but this is where it gets complex. The only rationalization for PFI that this author has yet come across is in How Will Capitalism End by Wolfgang Streeck. Not exactly a page-turner it nevertheless merits perusal.

In describing the rise of the ‘European consolidation state’ he asks…What are the lasting political-economic consequences of states devoting themselves to fiscal consolidation, in order to reassure financial markets that they will consider their debt obligations sacrosanct and do whatever it takes to remain fit for debt service?

One consequence is….

Budget balancing allows no new debt, and this remains all the more for debt reduction by fiscal surplice. Public investment will therefore have to be paid for out of what will very likely be shrinking current revenue. Regaining and retaining the confidence of financial markets may therefore require governments to cut public investment even if real interest rates on government debt approach zero. Resulting deficiencies in physical and social infrastructures must be attended to by private investors assuming what had previously been public responsibilities. One effect is likely to be public-private partnerships (PPPs) of various sorts, with private investment backed by the public, and governments or individuals paying user fees to private firms. Indications are that states and private citizens will be paying more under such arrangements as they would have paid had the investment remained in public hands. This seems to hold especially for local communities, which often lack the expertise to negotiate with the legal departments of international investors.

Basically our governments have sold our NHS down the river at the behest of the same financial institutions that bankrupted us in 2008 and whom we bailed out.

Revolution anyone?

Forest Gump

Written by

The UK National Health Service is a national treasure under threat from the global financial behemoth that threatens Democracy, civilisation and the planet.

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