Education And Debate The private finance initiative

PFI in the NHS—is there an economic case?

BMJ 1999; 319 doi: https://doi.org/10.1136/bmj.319.7202.116 (Published 10 July 1999) Cite this as: BMJ 1999;319:116
  1. Declan Gaffney, research fellowa,
  2. Allyson M Pollock, head (allyson.pollock@ucl.ac.uk)a,
  3. David Price, research fellowb,
  4. Jean Shaoul, lecturerc
  1. a Health Policy and Health Services Research Unit, School of Public Policy, University College London, London WC1H 9EZ
  2. b Social Welfare Research Unit, University of Northumbria, Newcastle upon Tyne NE7 7XA
  3. c Department of Accounting, University of Manchester, Manchester M13 9PL
  1. Correspondence to: Allyson Pollock

    The private finance initiative substantially increases the cost of hospital building. Total costs (construction costs plus financing costs) in a sample of hospitals built under the private finance initiative are 18-60% higher than construction costs alone (table 1). Shareholders in private finance initiative schemes can expect real returns of 15-25% a year.1 The consortiums involved in these schemes charge the NHS fees equivalent to 11.2-18.5% of construction costs (table 2). If the Treasury were to finance new hospitals directly out of its own borrowing it would pay a real rate of annual interest of 3.0-3.5%. It has been estimated that the £2.7 billion Scottish private finance initiative programme will cost, at a conservative estimate, “£2 billion more than if the Treasury had acquired the assets directly.”2 The higher costs will be met locally through cuts in clinical spending and nationally through subsidies from NHS capital budgets.

    Medical staff are deeply implicated in hospital private finance initiative schemes. Clinical directors approve and medical directors sign off the full business case, clinical posts are lost, and heroic targets are set for gains in medical productivity. Clinical concerns are generally met by assurances that the largely undisclosed price of the private finance initiative is well worth paying because schemes approved by the initiative offer better value for money than public procurement. This claim is based on the fact that, for approval purposes, all privately financed schemes are compared with a notional publicly funded equivalent, the public sector comparator. However, this comparison is carried out using an appraisal methodology under which the cash payments associated with each option are “discounted,” and costs are adjusted to reflect “risk transfer.” Both these factors have an influence on the results of the comparison. The appraisal methodology is prescribed in government guidance and plays a crucial …

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