FactCheck: Does PFI offer the taxpayer value for money?
“We are using PFI to ensure value for money and that the public interest and public services are properly protected when we increase public investment.”
Gordon Brown, The Times, September 26, 2002
Cathy Newman checks it out
When the Private Finance Initiative ends up costing one hospital more than £300 to change a light bulb, clearly something’s not right.
Now Channel 4 News understands the Treasury has had enough. George Osborne is hoping costly PFI deals can be unpicked, potentially saving up to £1bn for the public purse.
He’s sending a Swat team of accountants and lawyers into the Queen’s Hospital in Romford, Essex, where a rebuilding programme which originally cost £261m will end up costing the taxpayer more than three times that, with interest payments alone totalling £20m a year.
If money can be saved there, the experiment will be repeated across the public sector.
So contrary to Gordon Brown’s claims that the PFI was “value for money”, is it really – as it was once nicknamed – “perfidious financial idiocy”?
The Private Finance Initiative (PFI) was dreamt up by Lord Lamont in 1992 as a way of getting the private sector to build and run big public projects – like the Channel Tunnel rail link and the Jubilee Line underground extension – which would then be rented back to the state over several decades.
But within two years, the then-Shadow Chancellor Gordon Brown had enthusiastically embraced the idea, claiming: “We have stolen a march on the Tories”.
Under complex deals, the projects would be carried out by private contractors, who’d own the structure for up to 35 years. The public sector body – such as the NHS or the MoD – paid the contractors annual interest, as well as paying off the capital sum and maintenance. PFI charges are also indexed to inflation, so when – as now – inflation increases, so does the cost of many of the deals.
Lord Lamont argues that Labour has abused the PFI, which, he told The Spectator, “was only for ventures like new bridges or toll roads, never for ordinary public spending”.
In the first five years of the scheme, £2.2bn was spent on the 628 major PFI deals under the Tories – on projects such as non-combat vehicles for the Royal Air Force, or infrastructure such as the driverless Docklands Light Railway in London. In the next five years under New Labour, spending climbed to £14.2bn, research by The Spectator found.
In Labour’s 1997 Manifesto, the party promised to “overcome the problems that have plagued the PFI at a national level”, and in May 1997 it gave the go-ahead to 73 hospital building schemes by publishing a Bill that removed the legal issues surrounding the NHS doing deals with private companies.
The University of Edinburgh’s Professor Allyson Pollock found recently that between 1997 and 2009, 101 of the 135 new NHS hospitals built were paid for under PFI – using 90 per cent of the £12.2bn committed under successive building programmes. The aggregate of all PFI repayments in 2009-10 was £42.79bn.
During that time, Mr Brown fought back at union wrath and at doctors who dubbed PFI “perfidious financial idiocy”.
Dave Prentis, general secretary of Unison, said in 2002: “The government is relentlessly pursuing a policy that wastes money, wastes time, and failed any objective test of value for money. It cannot be right that during a period of unprecedented public investment huge profits are going into private pockets.”
The union backlash prompted a charm offensive from Mr Brown and Deputy Prime Minister John Prescott. The latter insisted the public had “nothing to be scared of…they are just a different way of providing a public service”.
Their tenacity paid off in one crucial respect: big public building projects were by and large delivered on time and on budget.
A 2009 report by the National Audit Office (NAO) found that 69 per cent of PFI construction projects between 2003 and 2008 were delivered on time and 65 per cent were delivered at the contracted price.
However, Mr Brown also told BBC Radio 4 back in 2002: “I’ve got evidence that we are achieving value for money”; citing 25 independent reports by the National Audit Office (NAO) under which every major project was examined.
The NAO checked its archives for FactCheck today and drew “a bit of a blank”. “There certainly wasn’t a compendium of reports done,” a spokeswoman said, adding that in any case the verdict was more likely to be mixed on PFI being value for money.
FactCheck found 19 independent reports on PFI published by the NAO before September 2002, when Mr Brown’s article was published.
Professor Pollock’s report, published in the BMJ, argues that NHS contracts alone are not good value, and worse – are endangering patient care.
Since 1991 all NHS trusts have had to pay a charge on NHS buildings and equipment to the Treasury, which averages around 6 per cent of income. But NHS trusts with PFI contracts may spend up to a vast 18.6 per cent of their annual income paying off private contractors, according to Professor Pollock.
Latest NAO figures put the total capital value of all PFI projects in England – there were more than 500 in 2009 – at around £28bn.
The Daily Telegraph meanwhile used Freedom of Information requests to show that more than 900 schemes have been completed with a total capital value of £56bn – yet the amount the taxpayer will have to repay currently stands at £229bn due to accumulated interest.
Take the Princess Royal University Hospital in Bromley in Kent, for example: it cost the contractor £118m to build, but the final bill for the taxpayer will be £1.2 bn.
Earlier this month, a hospital trust in County Durham was the first to opt for a “voluntary termination” of its PFI contract, paying £18m upfront to get out of the contract 23 years early, in order to save £14m. You can hardly blame them.
Cathy Newman’s verdict
Visit Queen’s Hospital in Romford – as I did today – and it’s hard not to be impressed by the architecture, with its ingenious lay-out and airy atrium.
But while the building has won awards for architectural excellence, there are no prizes for the financing of the deal, which like a host of similar PFI projects are now becoming a burden on the public purse.
It’s not just the interest payments, but also the cost of services provided by the private sector.
Apart from the legendary light bulb, a PFI school found it had to pay £300 to install a single plug socket.
What started as a neat idea to get big business to help fund public building schemes has ended up allowing some in the private sector to enrich themselves at the expense of the state.
Gordon Brown wouldn’t even need to reach for his calculator in his Kirkcaldy study to know that’s no value for money.