10 February 2006
The introduction of payment by results has put large capital building programmes under the spotlight, as it becomes clear that the new finance system will struggle to pay for long-term PFI commitments
Sometimes, governments shrink from the obvious. For years, experts have warned that the logic of large, intractable Private Finance Initiative contracts is in conflict with that of a dynamic, marketised NHS system.
When the Department of Health was asked to sign off final business cases for some of the larger schemes recently, it seems the myopia suddenly cleared.
At the end of January, health officials announced a reappraisal of the entire hospital-building programme, and a reduction in the size of the programme from £11.9bn (as per the DoH website's project list) to between £7bn and £9bn. This cut, of up to 40%, represents the biggest shake-up of PFI policy since 1997.
But in the context of the planned NHS structures, there was no choice.
There are basically three problems with the PFI in the context of payment by results — the new trust financing method that underpins the government's health market model.
First, since money will follow the patient, and patients have increased choice, it is impossible for trusts to know what they will be providing in the long term.
In theory, where services are unpopular with patients, facilities and services will have to close. That poses problems for trusts that are tied into 30- to 60-year PFI contracts.
A second, and related, problem is the increasingly diverse market for health care provision, especially as the health white paper, published last week, envisages a major increase in the involvement of the private sector in delivering NHS care.
There is no way a trust about to undertake a PFI commitment can plan for this. Nor can a trust with an existing scheme offset the inevitable financial impact.
The third problem is more complex, but is starting to show up in strategic health authority reviews of PFI business cases.
The introduction of payment by results effectively rules out specific price increases to recover the additional costs of PFI projects. In future, trusts' income will be based on activity levels, priced by a national tariff, which is set according to average prices across the NHS.
Since PFI contracts push a trust's estate costs above the average, these costs will have to be financed through efficiency savings or additional activity.
At the £1.1bn Barts & The London PFI, for example, managers have had to plan efficiency savings of £22m, or 4.2% of turnover, and an increase in activity worth £37m a year. If these ambitious targets cannot be met, the trust will have to reduce services, or go into deficit.
Ministerial justifications for the recent review of the Barts & The London plan has suggested there is something different about its cost increases. In an interview with the BBC, Health Secretary Health Patricia Hewitt referred to the 'almost doubling' of the scheme's capital value. But, in fact, Barts & The London has seen a comparatively modest increase of 81% of costs since the government signed off the outline business case.
Figures from the draft public spending memorandum, which the government sends annually to the Commons' health select committee, state that the average cost increase on schemes in procurement is 140% between OBC and current estimates.
Both the Birmingham and Leicester schemes, whose combined costs are about the same as those of Barts & The London, have seen larger cost hikes.
Just as the affordability problems associated with the scheme are not unusual, neither are affordability problems anything new for the PFI.
The example of the Queen Elizabeth Hospital in southeast London shows that PFI-related deficits are already a significant problem. This trust is heading for a £19m deficit this year, half of which managers blame on the 'excess costs' of the PFI deal, and it remains to be seen how it will fare under PBR.
In the past, the effect of affordability problems created by PFI has been partially ameliorated through central subsidies from the DoH. But under PBR, the level of revenue support will be low: just 2.5% of capital value annually, and only for the first three years of a deal.
After this time, trusts are expected to have generated such efficiencies from their new buildings that they will be able to meet the full costs themselves. The idea that this support will be adequate looks optimistic.
The decision to re-appraise PFI projects must be welcome. In the context of PBR, the long-standing affordability problems associated with the policy are brought into even starker relief, as Barts demonstrates.
But it is doubtful whether the PFI and the new NHS can work on a project-by-project basis. It seems the policy itself is in need of treatment.
Mark Hellowell is a research fellow in public-private partnerships at the University of Edinburgh
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