Private Affluence, Public Rip-Off

New Labour’s enthusiasm for business is matched only by its lack of business sense, as the private finance fiasco shows.

By George Monbiot. Published in the Spectator 10th March 2002

The government can’t pretend that it lacked advice. In 1997, before construction had begun, the doctors who had seen the plans for the proposed Cumberland Infirmary warned that it looked “more like a doss-house” than a hospital. Carlisle’s consultants’ committee pronounced the scheme “clinically unworkable”.

But selective hearing is New Labour’s primary sense. In June 2000, when Tony Blair unveiled the plaque, he announced that “this magnificent new hospital … symbolises what we have been trying to do for the health service”.

Within weeks the magnificent new hospital began falling apart. Pipes split, flooding the wards with water and the operating theatre with sewage. Power cuts left nurses ventilating patients on life support machines by hand. Ceilings collapsed and windows blew out of their frames. By August, all the beds were full and doctors were being asked to move patients into armchairs to make way for people recovering from surgery.

All new hospitals encounter problems, but those plaguing the Cumberland have proved to be both persistant and systemic. Both in design and in execution, the people who built it appear to have cut corners. Though the new hospital contains 75 fewer beds than the buildings it replaced, there is so little space in the wards that the doors have had to be removed to make room, and the trolleys redesigned to fit in the aisles. The hospital was built with a glass atrium but no air conditioning, with the result that temperatures have reached 110 degrees in the summer.

All this might sound like a classic tale of NHS mismanagement. But this case is different. The Cumberland was the first privately financed hospital to open in the United Kingdom, the flagship for a whole new fleet, which would cruise past the squalls and doldrums of public funding. For the past six years, I have been investigating the private finance initaitive, particularly in the health sector. My research suggests that problems of the kind infesting the Cumberland are likely to emerge in almost all the new hospitals built by this means.

Because the private finance initiative mobilises private capital, ministers have argued, it allows the government to start more schemes than it would otherwise be able to commission. Private companies provide the money for public infrastructure the state can’t afford, and the government pays it back over a number of years. Because the private sector is more efficient, they insist, PFI schemes offer better value for money than public funding. And because private companies, rather than the government, provide the capital, the money spent on new projects does not contribute to the public sector borrowing requirement.

The reality is that PFI, or “public private partnership” as the government now prefers to call it, is a scam. It works for neither socialists nor free marketeers, as it offers neither effective public provision nor business efficiencies. Far from introducing market disciplines, it has become an official licence to fleece the taxpayer. Far from reducing the public sector borrowing requirement, PFI is, as the Accounting Standards Board has noted, simply an “an off-balance sheet fiddle”. Most alarmingly, the ministers I have spoken to simply do not understand how it works.

The initiative was a Conservative experiment. In opposition, Labour fiercely contested it. But as soon as the party came to power, it resolved that PFI would become the means by which most of our new public infrastructure would be built. By the time it became obvious that the experiment was failing, Labour had waded in too far. Awestruck by its glittering new friends in business, but baffled by the complexities of the scheme it supports, it has been consistently outwitted and outmanouevred.

The first of the problems Labour has failed to grasp is the process by which the private investors are chosen. The government announces a new scheme, companies make their bids, and the government selects the bid which appears to offer best value for money. The chosen consortium is named the “preferred bidder”, and the government starts to negotiate the contract.

The consortium then has the government over a barrel. In theory, the contract is still open to competition. In practice, preferred bidders have been deselected only, as far as I can discover, in two of the hundreds of PFI schemes the government has launched. Once the consortium has its foot in the door, it starts to raise its price and reduce its services. It will discover costs which weren’t envisaged before. It will price the likely inflation of labour and materials as generously as possible. In some cases, I have found, companies have simply slipped extra figures into the spreadsheets.

Most importantly, value for money in PFI contracts is a function of the extent to which the projects’ risks are transferred to the private sector. Because the government is hopelessly outclassed, during negotiations companies routinely transfer most of the key risks back to the taxpayer. As a result, PFI, from the corporate point of view, is a far better deal than privatisation. The consortia get the assets but not the liabilities. In some cases, they carry no greater risk than ordinary contractors for the public sector, but they are rewarded as if they were the most reckless entrepreneurs.

Last summer I received definitive evidence that Octagon Healthcare, the private consortium building the Norfolk and Norwich hospital, was in a position to extract £70 million from the scheme, before it had taken a single patient. The money, which would have taken the form of a “refinancing” of its bank loans, represented just part of the difference between the presumed transfer of financial risk on which the contract had been based and financed, and the actual transfer of risk. The consortium could, quite legally, have withdrawn the money (which was enough, by itself, to build a medium-sized hospital) by renegotiating the terms of its borrowing.

When I broke the story it caused a minor scandal, and Octagon appears not to have taken advantage of its position. But deals of this kind are now routine. In one case — the PFI prison built by Group 4 and Carillion in Liverpool — refinancing has allowed the companies to double their rate of return: they will break even just two and a half years into the 25-year contract.

These problems are compounded by the lack of effective competition between the private and the public sectors. When Alan Milburn, the health secretary, warned the NHS that “it’s PFI or bust”, hospital trusts began redesigning their projects to attract private money.

In Coventry, for example, the NHS had originally intended to renovate the Walsgrave Hospital, on the outskirts of town, at a cost of some £30 million. Built in the 1970s, it appeared to be structurally sound, but it was in need of modernisation. But in 1997, after the Labour government indicated that no substantial public funding would be available, the NHS submitted a new plan: for the privately financed demolition of both the Walsgrave and the city centre’s Coventry and Warwick Hospital, and the construction of a new hospital on the Walsgrave site. This would provide 25 per cent fewer all-purpose beds and 20 per cent fewer staff than the two hospitals it replaced, and it would cost £174 million to build. The NHS would pay the consortium £36 million a year for 25 years, plus a one-off equipment grant of £25 million, and it would give the companies the land on which the city centre hospital stands. Since then, the cost of construction has risen to £311 million, but the new scheme still offers fewer beds than the two hospitals it will replace.

None of this made sense until I received a leaked copy of a confidential report commissioned by the local health authority. To become profitable for a private operator, a new scheme, the paper revealed, would have to make four times as much money as the nominal “surplus” returned to the Treasury by the city’s existing hospitals. The £30m contract for renovating the Walsgrave, in other words, would have been too small to make it attractive to a private consortium. This option had had to be rejected because it was too cheap. The project, the report found, had been “progressively tailored to fit the needs of private investors”.

I have also obtained evidence that, in order to smooth the way for the private money they need, public bodies are deliberately setting the “public sector comparator” higher than the private sector bids they receive. The National Audit Office and the independent auditors the government appoints look at these projects and pronounce them value for money. But by relying on the official comparators, the official assessments of risk and the official view of whether or not these schemes were needed in the first place, they are bound to find in their favour.

There’s no question that attracting private money allows the government to commission more public infrastructure schemes (though in the NHS the result is a substantial net reduction in the number of hospitals, as the private operators concentrate the new facilities on single sites). But, as the Labour minister Alastair Darling commented when he was shadow chief secretary to the Treasury, “apparent savings now could be countered by the formidable commitment on revenue expenditure in years to come”. As the service payments for projects commissioned today mount up, future governments will discover that there’s no money left for starting new ones.

There is only ones means of meeting the outrageous costs of PFI, and that is by cutting public services. A study by a consultancy company which works for the Department of Health shows that every £200 million spent on privately financed hospitals will result in the loss of 1000 doctors and nurses. The first PFI hospitals contain some 28 per cent fewer beds than the ones they replaced. Alan Milburn has promised that future schemes will not result in bed reductions, but he can keep this promise only by increasing their costs still further.

The government is in the most dangerous of all positions: its fawning willingness to prove that it is now the party of big business is matched only by a total failure to understand how business works. Without commercial experience, Blair and his ministers regard the companies they court with a kind of superstitious awe: “partnership”, irrespective of terms, will summon up some economic magic which turns base motives into gold. And these are the people who now call themselves the party of economic competence.

For years, lefty that I am, I have argued against the privatisation of the NHS. This is still my position. But after discovering how the public sector is being savaged by the government which claims to be its saviour, I must reluctantly conclude that even the outright sale of the service — with its liabilities as well as its assets — would provide a better deal for both patients and taxpayers than Blair’s great giveaway.