Bleeding Us Dry

Money is being siphoned out of our new hospitals before they receive a single patient

By George Monbiot. Published in the Guardian 5th June 2001

I have in my hands the epitaph for the first New Labour government. It consists of just two lines, contained in a table faxed to me by the department of health. The first line reads: Available beds in England, 1996-1997: 198,848. The second line reads: Available beds in England,1999-2000: 186,290. In these figures lies the real endowment which our radical government has bequeathed to the nation.

Labour’s manifesto maintains that the NHS has “grown by a third” since 1997, and boasts that the government has overseen “the biggest sustained increase” in spending in the history of the health service. We know that its investment figures commonly turn out to be rather less impressive than they first appear. But there’s no question that it has poured many billions of pounds into the NHS, partly to meet its promise of a sustained reduction in waiting times: a promise which can be met only by increasing the number of available beds. So when we discover that bed numbers have fallen by twelve and a half thousand in England (and some 5,000 in Scotland), we can see that something is seriously wrong. Our money has evaporated. I think I have just found out where it’s gone.

As most of the readers of this page will, by now, be painfully aware, the private finance initiative (under which much of the country’s new infrastructure is being built) is a pernicious scam. The public hospitals, roads, schools and prisons constructed with private money generally cost more than their public equivalents, while delivering worse services. As private companies, unlike the government, seek to make a healthy profit on their investment, this should scarcely be surprising. But what I have discovered now suggests that the problem is far graver than anyone had guessed. Our money is being siphoned out of the NHS before the privately financed hospitals receive a single patient.

The Norfolk and Norwich hospital is one of the biggest PFI schemes in Britain. It was bitterly opposed by local people. The old city centre buildings will be shut and the land they occupy sold for executive housing. The new hospital is being built on greenfield land five miles from the centre of Norwich. But what upsets the people of Norfolk most is that — though its cost has risen from an initial estimate of £90 million to the current £229 million — the new hospital will provide only 953 beds, by comparison to the 1207 in the existing buildings. If the new complex costs so much, why is it so small? I think I have stumbled across part of the answer.

I have found definitive evidence that Octagon Healthcare, the private consortium building the hospital, will soon be in a position to suck £70 million out of the project, over and above the profits it is due to make. It can extract this money from the hospital scheme by means of a clever, complex but entirely legal process called “refinancing”.

When a consortium has been chosen by the government to build a privately financed hospital, it borrows money from the banks. The interest rates the banks charge depend partly on how risky they believe the project to be. Once the hospital has been built, however, most of the risk disappears. And PFI schemes now turn out to be considerably less risky than the banks first assumed, not least because the government has guaranteed to the private companies that their profits come first. If the NHS is faced with a choice of leaving patients to die in hospital corridors or paying the money it owes to the consortia, it is now legally and contractually bound to honour its financial commitments.

This means that when the corporations complete their hospital, they can borrow against their future earnings at a significantly lower rate than before, and extend the period over which they must repay the money. So they re-borrow the same money more cheaply, pay off their original creditors and then pocket the difference. The potential gains are enormous. Octagon Healthcare’s five shareholders — Barclays Bank, the construction company John Laing, the financiers Innisfree and 3i and the service providers Serco — invested some £30 million of their own money. The figures I have seen show that they could walk away with £70 million even before they start charging the NHS for their services.

All this might sound very boring and technical. But that £70 million is all money which would have stayed within the NHS, had the hospital been publicly financed. It represents one per cent of the government’s entire 14-year hospital building programme. It is enough, by itself, to build a medium-sized hospital. And what is happening in Norwich, I have discovered, is happening all over the country: scores of PFI projects are being refinanced by their shareholders, draining billions of pounds from our essential infrastructure.

This refinancing represents just part of the difference between the terms on which the government can borrow and the terms on which private companies can borrow. Governments are regarded by lenders as a safer bet than corporations. PFI will always offer worse value for money than public funding because the debt required to support it costs more.

When I spoke to Octagon Healthcare’s general manager, he stressed that the refinancing deal hasn’t happened yet, and that financial conditions may change between now and the hospital’s completion in the autumn. But he agreed that £70m is a figure he has heard. He insisted that the hospital remains good value for money. Every PFI proposal, he pointed out, is tested by the NHS and the Treasury: if it isn’t cheaper than its public equivalent, it won’t be commissioned.

In principle, he’s right. In practice, value for money has nothing to do with it. In July 1997, Alan Milburn, the health secretary, announced that new hospitals would not be built with public money: “it’s PFI or bust”. He inherited this policy from the Tories, who commissioned the Norfolk and Norwich scheme. They made it clear to the NHS that whatever the financial case looked like there was no point in applying to the government for funding.

In previous columns and in my book I’ve shown how PFI projects are manipulated. I’ve seen how hospital refurbishment schemes are rejected because they are too cheap, and replaced with more lucrative demolition and rebuilding projects, which allow the companies to charge higher rents and sell valuable city centre land. But what these new findings show is that the private finance initiative will always deliver bad value for money, however it is conducted. It is a gift to big business and a disaster for everyone else.

Suddenly the decline in bed numbers makes sense. However much the government pours into the NHS, the service will continue to shrink, as our money is drained into the shareholders’ accounts.

I can’t blame the companies involved in PFI for taking everything they can get: their directors have, after all, a legal duty to maximise the value of their shares. But a government which lets them do it at public expense is a government unfit for office. Tony Blair has been asking us to “put schools and hospitals first” when we go to the polls on Thursday. I urge you to do as he suggests, by voting for a change of government.