23 March 2007
The Private Finance Initiative could be costing the NHS an extra £480m a year as private equity providers enjoy a 58% return on their investment, according to research from Manchester Business School.
An MBS report, The cost of using private finance to build, finance and operate the first 12 NHS hospitals in England, examines the first PFI hospitals, which became operational in 2000/01.
By studying the charges paid by the hospital trusts and the accounts of the PFI special purpose vehicles, the authors found that the average cost of capital for SPVs was 8% – or £123m a year: almost twice as high as the cost of public sector borrowing.
'This means that by 2005, the additional cost of private finance was about £60m a year on 12 capital projects worth £1.2bn,' the researchers – Jean Shaoul, Anne Stafford and Pam Stapleton – state. 'If this experience is generalised across the entire PFI programme… then the extra cost of private finance for the signed PFI capital programme in hospitals… is about £480m every year.'
The higher cost of capital for the SPVs was accounted for largely through the higher interest rate private borrowers are subject to (around 7%–8% in the cases examined), but also by the rates of return paid to private equity investors.
After five years with no return on their investment (while the hospitals were still being built), equity providers claimed a 58% post-tax return in 2005; a rate that Shaoul told Public Finance was 'set to continue for the remainder of the 30-year contracts'.
That return is four times higher than the ceiling 14%–15% rate of return seen in other PFI deals, which the Treasury described as 'too high' in 2005.
The report also raises concerns about the on-going affordability of PFI schemes as hospital trusts move to a less stable funding regime. Between 2000 and 2005, the annual charges paid by hospital trusts to PFI SPVs increased by an average 20% above the anticipated charges detailed in the full business case. This meant that despite large increases in NHS funding over the same period, PFI charges remained fixed at around 12% of a trust's income.
The research has been peer-reviewed for academic publication later this year.
The Department of Health rejected the figures. 'We would dispute the researchers' conclusions,' a DoH spokesman said. 'The use of 7%–8% as the private sector rate of debt is wrong as this is project finance and the rate depends on the project and the clients.' The researchers say their figure is an arithmetic average based on actual figures.
The DoH also disputed the 58% figure for the return on private equity. 'The equity returns of NHS PFI schemes are in the region of 12%–14%,' the spokesman said. He added: 'The PFI payment may take up 12% of a trust's income, but this will be no more than would be paid if the new non-clinical services and estate had been paid for under the conventional route.'
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