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Education And Debate The private finance initiative

The politics of the private finance initiative and the new NHS

BMJ 1999; 319 doi: https://doi.org/10.1136/bmj.319.7204.249 (Published 24 July 1999) Cite this as: BMJ 1999;319:249

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Previously found inadequate?

Previously Found Inadequate? Historical perspectives on the PFI

Those who do not understand history may be condemned to repeat it. In
addition to the many points raised in Pollock et al's articles, analyses
of the impacts of the PFI might benefit from consideration of the reasons
why such methods of financing hospital development have been found wanting
and rejected in the past history of the NHS. Prior to the NHS
responsibilities for hospital provision were divided between local
authorities and the voluntary sector. Funding for capital developments by
the latter was derived from charitable sources while the former had to
take out loans to build hospitals.

They required the approval of the Ministry of Health to do this but
the Ministry's approval was not automatic. Their approach to loan
sanction operated in such a way as potentially to disadvantage those
localities in greatest need. Very restrictive criteria were applied to
assess the likelihood that local authorities would default on loans. If
they were regarded as potential defaulters, because of their poor economic
prospects, they were likely to be denied funds. (1) Yet, ceteris paribus,
local authorities whose economic prospects were regarded as poor were also
characterised by high levels of poverty and poor health status. This
applied particularly in, but was not confined to, places severely
affected by the inter-war depression, such as North East England,
Cumberland, and South Wales. Inter-war surveys by the Ministry of Health
provide ample evidence that economic depression heavily circumscribed the
ability of authorities in such places to develop health services. Even
localities where the Ministry recognised the need for additional hospital
accommodation was greatest, such as County Durham, were reminded of the
likely burden on the rates of taking out additional loans. This helped to
deter them from proceeding with new developments, and the consequence was
the retention of inadequate hospital provision inherited from the Poor Law
(2). One can argue, therefore, that such market-based criteria worked
against the interests of less prosperous communities. The potential
contemporary parallels are that, to the extent that PFI deals require
income from private patients and / or profitable disposals of surplus land
and buildings, they are more likely to be feasible in the more prosperous
parts of the country. In contrast localities with less potential for
private practice, or with low local property prices, may be denied capital
funding under PFI criteria. They will therefore have to continue to take
their place in the queue for a declining programme of publicly-financed
capital investment.

These debates resurfaced after the establishment of the NHS. The
question of financing hospital development out of loans was raised from a
perhaps unlikely quarter. Aneurin Bevan chafed at the constraints of post-
war austerity, which severely limited NHS capital investment. He proposed
that the health service be permitted to borrow for capital investment on
the grounds that there was 'no reason why the NHS should be limited to the
jog trot of the annual vote'. He suggested that in doing so the NHS would
only be carrying on previous local government practice. (3) This
submission by Bevan was swiftly rejected by the Treasury. Bevan's analogy
with local government did not apply. Local authorities were permitted to
borrow because they varied considerably in size and resources, and they
depended heavily for funds on the prosperity of local businesses. In the
absence of central government grants for capital development, loans
therefore offered one way of spreading the cost of hospital provision. By
contrast, central government had a much more stable financial basis. A
second reason why the Treasury objected to such proposals was that under
the NHS hospital authorities had no independent source of revenue for the
very simple reason that health care was provided free at the point of use.
In this respect the NHS was quite unlike other public corporations which
had been permitted to borrow, so the cost of loan repayments would fall on
taxpayers. It was deemed more economical, instead, to finance capital
expenditure through taxation.

The question of loan finance was raised again in the deliberations of
the Guillebaud Committee (4). Numerous witnesses from various Regional
Hospital boards (RHBs) complained of the constraints they were under, and
argued that loan finance would enable them to undertake works which would
produce revenue savings (e.g. replacing inefficient plant such as boilers
and laundries) on a scale sufficient to offset interest charges on loans.
Others disputed this, suggesting that the net cost to the Exchequer would
ultimately be greater. Treasury evidence to Guillebaud took the latter
view, suggesting that the net cost of interest payments would exceed
revenue savings in the long run. (5)

Other Treasury papers discussed the difficulty of applying quasi-
commercial criteria to the NHS. When the hospitals had been nationalised,
it had been considered 'out of the question' to value the property taken
over, so no provision was made for depreciation' (6). The process was
therefore 'very unreal.... no-one was in the market to buy hospitals', any
valuations would therefore be 'notional', and costing for depreciation
would therefore be a process with, at best, spurious accuracy.
Consequently, despite the political attractions of expanding what was,
during the 1950s, a very limited capital programme, loan finance was
rejected.

These warnings by the Treasury could apply as much to the 1990s as to
the 1950s: PFI deals do not show that the technical difficulties of
valuing hospital assets have been satisfactorily resolved, as arguments
about the definition of capital charges make clear. The major criticism
of the PFI, that interest payments greatly inflate the lifetime cost of
PFI deals, is precisely that made by the Treasury in evidence to
Guillebaud. Moreover, to the extent that PFI deals are predicated upon
greater reliance on income from private patients and land sales, they will
clearly favour the most prosperous regions. This may well reintroduce into
the NHS the mechanisms that produced a highly uneven pattern of service
provision prior to 1948 (7).

References

1. Ward, S. 1984. List Q: a missing link in inter-war public investment.
Public Administration, 62, 348-58.

2. Mohan, J. 1997. Neglected roots of regionalism? The Commissioners for
the Special Areas and Grants to Hospital Services in the 1930s. Social
history of Medicine, 10, 243-62.

3. Correspondence between Bevan and Treasury officials, PRO Treasury
papers.

4. Guillebaud, C W (Chairman) (1956) Report of the Committee of Inquiry
into the Cost of the National Health Service (Cmd. 9663) London: HMSO.

5. Public Records Office, T227/403, Treasury evidence to Guillebaud
Committee.

6. Public Records Office, T227/403, Workman-Rigby, 14.7.55

7. Gorsky, M, Mohan, J and Powell, M (forthcoming) British voluntary
hospitals 1970-1938: the historical geography of provision and utilisation
Journal of Historical Geography, forthcoming.

Competing interests: No competing interests

28 July 1999
John Mohan
Reader in geography, University of Portsmouth
Geography Department, University of Portsmouth, Buckingham Building, Lion Terrace, Portsmouth