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Chancellor unveils “son of PFI” to build next generation of hospitals

BMJ 2012; 345 doi: (Published 07 December 2012) Cite this as: BMJ 2012;345:e8334
  1. Ingrid Torjesen
  1. 1London

A new wave of hospitals will be built under a revamped version of the discredited private finance initiative (PFI) scheme, the chancellor of the exchequer, George Osborne, announced to the House of Commons in his autumn statement.

In a document published the same day outlining how the new public-private partnerships, to be known as PFI2, would work, the Treasury admitted that the existing PFI scheme had “become tarnished by its waste, inflexibility and lack of transparency.”1 Costly and inflexible PFI deals that tied trusts to expensive and inflexible contracts for many years have been blamed for the financial instability of at least 20 trusts.2

Osborne told MPs that the public sector had been “ripped off” by PFI schemes in the past. “The big difference is that from now on, instead of the public sector bearing the risk and getting none of the reward . . . it will share in the upside as well.”

“Soft” services such as cleaning and catering will be removed from all future PFI contracts, and trusts will have discretion over the inclusion of certain minor maintenance activities, such as redecorating. Some trusts in existing PFIs have been locked into maintenance contracts where it reportedly cost £300 (€370; $480) to change a light bulb.3

Under the old PFI schemes private companies could inject equity of just 10%, with the remaining funds being raised from debt or bonds. But the Treasury said that in future this bar would be raised to 20-25% to reduce the proportion that had to be raised, often from banks. The government also intends to act as a minority equity co-investor in future projects, giving it a seat on the board and a share of profits.

The chancellor said that most government departments (all except health, education, defence, and international development) would have to find an additional 1% in savings next year and 2% in 2014-15 to provide the government with a £5bn stake to invest. On top of this, the government was ready to provide guarantees for an additional £40bn. The first PFI2 scheme in the health sector will be a £380m hospital in Smethwick in the West Midlands.

To cut down on the windfall profits from equity, the government wants to reduce the number and size of secondary market transactions, by encouraging new types of long term investor, such as pension funds, to take a stake.

North Tees and Hartlepool Hospitals Foundation NHS Trust is already in talks with two pension funds over a £298m PFI deal,4 but historically this type of investor has tended to shy away because of the time, risk, and cost of bidding for PFI projects. With PFI2 schemes the government will introduce an equity funding competition after the preferred bidder stage for a proportion of the equity requirement to attract these new types of investors.

The procurement process will also be speeded up so that a preferred bidder would have to be appointed within 18 months of tendering. In the past this has sometimes taken up to five years, slowing down projects and increasing their cost.

Paul Flynn, chairman of the BMA’s consultants committee, said, “The BMA has long argued that PFI building projects resulted in many hospitals being crippled with very high repayment contracts. We are pleased that the chancellor has said he will reassess these contracts, and we look forward to more detail.”

Mike Farrar, chief executive of the NHS Confederation, which represents most NHS organisations, said, “The government is right to look at how the NHS can develop more flexible and affordable options to provide appropriate and modern facilities for patients. But we need any new approach to PFI to drive real savings, not just tinker around the edges. We also need to look at practical ways the NHS can squeeze more value from existing deals, given the severe financial pressures on the health service.”

The Treasury has reported that so far through renegotiation and more efficient and flexible use of assets more than £1.5bn of efficiencies and savings have been achieved in operational PFI contracts in England and that close to another £1bn are in discussion.

John Longworth, director general of the British Chambers of Commerce, said that the £5bn in capital being provided by the government “is just the tip of the iceberg” in terms of what is needed. “It’s not radical enough to unlock the resources needed to maintain and improve Britain’s business infrastructure,” he said.

“The political risks around infrastructure investment must be swept away—and fast—so that private finance can step in and shoulder some of the cost of our national infrastructure upgrade. And, at the same time, public sector resources should be re-prioritised away from current spending towards jump starting major infrastructure projects, which generate confidence in the short term, jobs in the medium term, and competitiveness for the long term.”


Cite this as: BMJ 2012;345:e8334


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