The Private Finance Initiative (PFI) began life in November 1992, two years after the enforced departure of Margaret Thatcher, and just months after John Major stunned the country by winning a surprise Tory election victory over the Labour Party led by Neil Kinnock.
Chancellor Norman Lamont delivered an Autumn Statement which announced:
“…the Government have too often in the past treated proposed projects as either wholly private or wholly public. In future, the Government will actively encourage joint ventures with the private sector, where these involve a sensible transfer of risk to the private sector.”
Up to then the Tories had shown little interest in investment in public sector infrastructure, and focused instead upon controlling “public spending in general and capital spending in particular”. Successive Labour Chancellors had also dutifully followed the advice of the Treasury, and seen it as their role to strictly control public spending and public sector borrowing.
This resulted in clapped out and crumbling facilities – and mounting private sector pressure for profitable contracts to be opened up. It had also resulted in the nationalised industries being starved of funds and in-house pressure for their privatisation to escape the financial straightjacket.
The Thatcher government had eagerly privatised the nationalised industries – but had baulked at privatisation of the NHS, which faced an unprecedented squeeze on its budgets (only surpassed by the squeeze imposed from 2010).
PFI appears to offer a way to keep public control of the services supplied in public facilities while turning to the private sector to provide funding, to take on the construction risk and to manage the facilities over the life of the asset according to a contract agreed in advance … and to generate very lucrative returns for shareholders as a result.
It offered many of the benefits of privatisation to the construction and banking sector, while leaving responsibility for paying for the new buildings in the public sector, and thus guaranteeing the flow of funds to cover the rising bills. It was to provide a rich vein of profits.
The move to embrace PFI as a policy meant breaking from rules specifically designed to guard against public sector bodies embarking upon schemes which might undermine tight controls on public spending.
However while it breached these rules, PFI was clearly in keeping with the post 1980 ideological frameworks of neoliberalism (with its obsession with maximum private sector role, free markets and minimum public/state involvement) and of “new public management” which centres on a maximum level of contracting out services and tasks to the private sector, and “steering, not rowing”.
Lamont’s successor as Chancellor, Kenneth Clarke, was an even more enthusiastic promoter of PFI, which he famously summed up in a 1993 speech to the CBI as:
“Privatising the process of capital investment in our key public services.”
The policy was eventually branded as the Private Finance Initiative – PFI – although the acronym was soon to be parodied as “Profits For Industry”, “Profiting From Illness,” or simply “Pure Financial Idiocy”.
The concept was relatively simple. PFI required projects above a certain minimum scale (in the NHS this was initially above £5m) to be opened up for bids from the private sector to finance the scheme, with repayments over a prolonged period of 25-30 years or more.
Rather than owning new hospital buildings, the NHS Hospital Trusts, (many still newly established, or just emerging after the controversial “internal market” reforms in 1990) would become lease-holders, required to make annual, index-linked payments for the use of the building and support services provided by contractors for the lifetime of the contract, which could be anything up to 60 years.
Hospitals built on this basis would no longer be public assets, but long-term public liabilities incurring increasing payments for a generation or more ahead. These capital schemes were not investments, but new forms of public sector debt.
NHS trust management would be left in control only of clinical care, while other support services including maintenance of the hospital buildings was to be done by profit-seeking private companies.
The 1990 Act had also established a new system of “capital charges” under which NHS Trusts had to pay a 6% charge on their net assets each year to the NHS Executive. The rationale for this was to in effect charge trusts a “rent” to mirror commercial pressures to make a return on assets employed in a business.
Its effect was to normalise the idea of NHS hospitals paying out from their core income to cover the costs of buildings and equipment: but there was a difference. While the NHS capital charges effectively recirculated within the NHS itself, the payments for PFI hospitals would flow out of the public sector … and in to the coffers of private companies, of which a sizeable share would be scooped out as profit or dividends.
In November 1994 Clarke went further, and proposed a massive £5 billion reduction in public spending, telling the CBI conference that in future the Treasury would only provide capital for projects as a last resort – “after private finance has been explored.”
However progress on PFI contracts was slow. By July 1996 angry and frustrated CBI leaders warned Clarke that PFI could fail without more decisive action. They were angry at the bureaucratic delays and costs which were holding up key infrastructure projects.
Tory legislation in 1996 was expected to free the logjam by giving a commitment that the government would effectively act as guarantor for any debts to PFI consortiums if one or more Trusts went bankrupt. Some trusts could be “winners” in the new, competitive, NHS ‘internal market’ – but others had to be losers.
Tory ministers believed their short Bill that was passed was sufficient – but they were soon proved wrong when one of the banks involved in the Dartford Hospital project raised doubts.
So despite all the negotiations and considerable expenditure on legal and accountancy advice, no hospital PFI schemes were signed under the government which invented PFI.
Some prominent Tories even warned that PFI might in fact prove not to be such a great idea after all. Even Norman Lamont, who first launched the PFI programme, later had doubts and in his memoirs in 1999 predicted the problems that were soon to befall hospital PFI projects:
“The government itself can always borrow money more cheaply than any private sector borrower, so the efficiency test of a private finance project has to be real.
[…]
“I suspect that in the long run some of these projects will go wrong and appear again on the Government’s balance sheet, adding to public spending. We shall see.” – Norman Lamont, writing in 1999
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- Labour’s response – from denunciation to promotion
Tony Blair won the 1997 election with a massive majority, raising high popular expectations of radical change. However, to the delight of a few and the dismay of many, Blair’s New Labour government appointed ministers even more attentive and eager than the Tories had been to satisfy the demands of the banks.
The new government’s only legislation on the NHS in 1997 was another short Bill to facilitate PFI. The National Health Service (Private Finance) Act was pushed through with just one amendment allowed, and with one aim in mind – to “remove any element of doubt” among the bankers that, despite all the tough-sounding rhetoric insisting that PFI contracts transferred risk to the private sector – there was no real risk at all, and their money was safe.
The health minister who pushed the new Bill through parliament, Alan Milburn, made clear the Bill was intended first and foremost to give the bankers just what they wanted:
“[It’s] about removing doubt, providing certainty, and above all getting new hospitals built”.
A Labour peer, Baroness Jay revealed who was effectively dictating the legislation:
“the banks concerned have seen and agreed the wording of the Bill and have made clear that it satisfies all their concerns.”
New Labour had completely changed its position on PFI, from a sceptical rejection in 1993, to embrace the policy enthusiastically and nurture it as their own in 1997. New Labour ministers now insisted that for the “overwhelming majority of new hospitals” limited availability of public capital meant it was now “PFI or bust”.
Two years earlier Margaret Beckett, as shadow health secretary, had toughened up Labour’s critical response, telling the Health Service Journal:
“As far as I am concerned PFI is totally unacceptable. It is the thin end of the wedge of privatisation.”
But in the summer of 1996 Shadow Treasury minister Mike O’Brien announced a reversal of New Labour’s policy:
“This idea must not be allowed to fail. Labour has a clear programme to rescue PFI”
The “rescue of PFI” was duly included in New Labour’s 1997 manifesto, sitting strangely alongside promises to scrap the NHS internal market. The pledge to scrap the market rather predictably proved to be an empty one: but the promises to implement PFI were sincere enough. By the spring of 1998, PFI was declared to be:
“A key part of the [New Labour] Government’s 10 year modernisation programme for the health service.”
While Kenneth Clarke had openly boasted that PFI would generate new profits for the private sector, New Labour, insisted using private investment to modernise public services was a “partnership,” an example of the ‘Third Way’ , finding common ground between neoliberalism and social democracy.
Milburn went further still and told MPs PFI could deliver actual savings as well as value for money, stating:
“… any scheme that is given the go-ahead has to prove it is cheaper, better, better value for money and better for patients than the public sector option, and I am convinced from all of the work that I have seen from officials that all of these schemes we have given the go-ahead to and all the schemes that we will give the go-ahead to in the future will prove, if they are built through the PFI, better value for money”.
However opinion elsewhere had hardened up against PFI. According to Guardian financial columnist Larry Elliott in the same year, PFI was simply “a scam“:
“Of all the scams pulled by the Conservatives in 18 years of power -and there were plenty -the Private Finance Initiative was perhaps the most blatant. … If ever a piece of ideological baggage cried out to be dumped on day one of a Labour government it was PFI.”
Despite its popularity with New Labour ministers (most notably with the Treasury team) PFI soon began to incur the increasingly vociferous opposition of the BMA, the Royal College of Nursing, UNISON and almost all trade unions, local campaigners in affected towns and cities, and a growing body of academics.
PFI came to be associated with funnelling profits to the private sector and contracting out/privatisation of support services.
Nevertheless as soon as the 1997 Act went through Parliament the go-ahead was suddenly given to 15 hospital projects in 1997, prior to devolution, so the first list of schemes agreed included one in Wales and three in Scotland.
One of the most remarkable features of these early projects, looking back, is the comparatively low capital costs of new PFI hospitals. 17 of the first 22 PFI hospitals were costed at below £100m. Even including the more expensive schemes the first wave schemes averaged less than £100m each.
However most first wave PFI hospitals – which in most cases brought sharp reductions (ranging from 20%-40%) in bed numbers – struggled both financially and clinically as a result of flawed schemes. Several of these same schemes are still in severe difficulties now, 21 years after the first of the PFI hospitals opened.
The bed reductions flowed from a combination of strenuous efforts to hold down costs by restricting the scale of the new buildings on the one hand, and on the other hand the involvement of management consultants committed to the introduction of “innovative methods,” who made hugely over-optimistic assumptions on the increase in throughput of patients per bed that could be achieved through the move to a new building – and sharp reduction of average length of stay.
In Worcestershire, for example, the PFI scheme, shaped by management consultants SECTA and the propositions put forward by the King’s Fund, sought to reduce bed numbers by 35%, and cut beds per 1,000 patients by 40%. This meant hoping for a truly massive increase in throughput per bed by reducing average length of stay – without any actual evidence that this could be achieved.
These issues appeared very abstract and theoretical when the proposals were first revealed, since no new hospital projects had begun since 1993. To make matters worse it was difficult to get any detailed or serious public discussion or political critique of specific issues and schemes: the media remained largely oblivious to the whole question of PFI, and MPs and pro-PFI enthusiasts were keen to brush aside and ridicule any critics of the scheme, dismissing them as negative opponents of building a new hospital.
Such was the pent-up level of expectation of quick results that when in 1997 another 23 schemes were postponed to future rounds, it was described by Financial Times health correspondent Nick Timmins as the biggest-ever “hospital cancellation programme”.
However experience over the following 20 years has vindicated many of the critics who warned that buildings would be too small, often in the wrong location, and bring excess costs – in some cases so substantial that other much-needed local service developments became increasingly unaffordable.
In one South East London trust, Queen Elizabeth Hospital, Woolwich, which opened in 2002, the scale of the financial problem reached the level of ‘technical bankruptcy’ just 3 years later, with the trust paying out 14.5% of its income on the “unitary charge” for use of the building and support services, according to a 2005 Audit Commission report. This was to cause even bigger repercussions from 2011 onwards, as we will see later in this series.
PFI also failed to deliver on another measure of value for money: many staff working in the new hospitals, especially the first wave PFI hospitals, were profoundly unimpressed by the quality and design of the buildings, criticising predictable practical problems, compounded by the limited or non-existent prior engagement with staff in drawing up the plans, and the failure to learn lessons from the first hospitals before completing plans for others with similar problems.
* This article is based upon part of the introductory chapter to the book Unhealthy Profits written by John Lister for UNISON Mid Yorkshire Health Branch of UNISON and published in 2018.
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