South London Healthcare NHS trust is not alone in its problems with the Private Finance Initiative. New projects worth £1.4bn are currently being procured and similar errors are still taking place
Health Secretary Andrew Lansley’s claim that the Private Finance Initiative is the main cause of financial problems at the South London Healthcare NHS Trust is true, but misleading. The way that English hospitals are funded for their activities has also contributed to the problem.
The Payment by Results system allocates resources to trusts on the basis of average costs across the NHS – so it’s no surprise that those with expensive PFI facilities (and thus higher than average fixed costs) often run deficits on their income and expenditure accounts. Such deficits can accumulate over time and the stock of debt can become unmanageable – especially in a period of severe budgetary austerity.
The question is what we should do to resolve the problem.
The best solution would be for the government to accept that large new buildings, however they are procured, cost a lot of money and the liabilities that such projects create cannot be funded from efficiency savings alone. Lansley should consider whether the current payment system can be restructured to enable NHS organisations to invest without sacrificing service quality or running into severe financial problems once new buildings become operational.
A sensible discussion seems unlikely to emerge, however. The current crop of ministers is keen to blame the problems on the previous administration. Yet it was Stephen Dorrell who, as Conservative health secretary in the mid-1990s, approved the business cases of the two large PFI projects that are causing all the problems in South London.
We now know that these business cases were hopelessly optimistic – Dorrell appeared to accept this (though did not take responsibility) in his interview with the Today programme yesterday morning.
John Major's government had every intention of signing the contracts, too – but they lost the election in 1997 before the procurement process was completed.
On a more specific point, it was also Dorrell who introduced the Residual Liabilities Act in 1996. This guaranteed that central government would stand behind trusts (and ensure all creditors would be paid) in the case of insolvency.
I don't blame him for this – it was the right thing to do, otherwise the banks would have charged a high interest rate for risks over which they had no control. But Dorrell's insistence now that creditors should be prepared to take a ‘hair cut’ a la investors in Greek bonds looks a little inconsistent, to say the least.
Any attempt to renege on PFI debts could be perceived by the market as a default – and a government that is currently borrowing £18bn a month is not going to take that risk.
The party political blame game is a distraction, as well as a deeply unedifying spectacle. Several new PFI projects – with a combined capital value of £1.4bn – are being procured by the coalition government. Similar mistakes are being made to those made in South London 15 years ago. This should be the focus of ministers' attention.
