Health PFI: Going somewhere?: Health Service Review

Posted on August 30, 2009 · Posted in Health Service Review

 

There were fears that the NHS could have been one of the main losers from the near collapse of the Private Finance Initiative. Over the last 12 years, some £12bn of new NHS capital projects have been commissioned through the PFI. But with the credit crunch and implosion of some of the banks most closely associated with the PFI, it seemed that the supply of infrastructure support was in jeopardy.

 

Two of the largest PFI lenders had been the Royal Bank of Scotland and Halifax Bank of Scotland – currently in no fit stage to make major PFI lending. Nor is the former Lloyds TSB, also a significant lender. Dexia was another of the largest lenders, now rescued by the French and Belgian governments. Even HSBC – one of the least affected major banks – has had to make a cash call and is unwilling to make large PFI loans, nor long-term lending commitments. The situation facing PFI was so bad that the industry body the PPP Forum called on the Government to inject at least £4bn in extra capital to keep PFI schemes on track.

 

The Government has complied with the desperate pleadings of the sector to ensure that some £13bn of PFI schemes in the pipeline will go ahead. This has been achieved by the Government itself injecting additional short-term capital into PFI schemes, lending on a short to medium term basis, alongside commercial lenders and the EU’s European Investment Bank. With symbolic irony, public finances are bailing-out the Private Finance Initiative – itself created because there was insufficient public finance for the necessary public infrastructure upgrade.

 

The immediate beneficiary of the additional support was a £430m new ‘superhospital’ for Bristol – given the go-ahead just minutes after the Treasury statement was issued. Carillion was selected as preferred bidder for the scheme that will have 800 beds and accommodate its first patients in 2013/14. The NHS trust still has to prove affordability of the project before final approval is given.

 

With outline support now provided, progress on finalising the hospital can move ahead, says Sonia Mills, chief executive of the North Bristol NHS Trust. “This is an important and exciting stage in the process and means that we can now move to final consideration of the contract and, subject to final approvals, construction work can begin in earnest at the site later this year,” she says. “The new hospital provides the opportunity to concentrate our specialist care services and functions in places where they will achieve the most benefit for patient care not only today, but in the future.”

 

One other health scheme was listed among the PFI projects secured by the Treasury’s new support programme. A £240m extension to the Victoria Hospital in Fife is now expected to proceed to completion.

 

Yet there are doubts about the extent to which the NHS more generally will benefit from the support package. For one thing, PFI is not in the overall scheme of things as important to the NHS as might be assumed – only 10% of NHS capital spending is funded through PFI. Nor will the capital support for PFI necessarily help more than the two signposted NHS schemes.

 

The Treasury expects its latest £13bn support programme to release £3.5bn of waste management projects, £3.1bn of transport schemes and £2.4bn of school construction and renovation. That suggests just £4bn will be released for all other sectors, of which nearly a billion pounds is already committed to the two PFI hospitals.

 

It sounds as if not much more will be available for NHS schemes. A spokesman for the Department of Health was unable to provide much clarity. “We do not hold any information about future PFI in production,” he says. “The NHS still has a number of PFI schemes in the development phase.”

 

The Confederation of British Industries has been at the forefront of lobbying for the extra support for PFI. A CBI spokesman was also unclear how much benefit there would be for the NHS. “I know some of the schemes in question are health schemes,” he agrees. “But the Treasury was quite vague on how long this funding would last and for which projects it would apply. We are not sure how many health schemes will be affected. We are pleased [with the additional support] because it will provide public services and help the construction industry. This isn’t new spending – it’s planned spending that could not go through the spending process. There is a question of whether you lose some of the benefits of the PFI by supporting it with public money. But we support it as long as they can build on what the PFI has achieved.”

 

Yet many believe that the days of PFI spending for the NHS may be nearing their natural end. The favoured big new hospital projects are now mostly either built or are under construction. Questions over affordability and flexibility mean that other funding mechanisms and smaller projects are now increasingly favoured. In particular, there are concerns about whether large PFI hospitals can be constructed and financed in ways that suit evolving medical provision and moves to greater community-based healthcare provision and telemedicine.

 

It may well be that in future there will be greater focus on more localised capital spending in the NHS, rather than the big mega-projects. That would fit health minister Lord Darzi’s vision for polyclinics – centres in which GPs and various health services are co-located, with increased use of telemedicine. It would also be a structure that would be much easier to finance.

 

LIFT – Local Improvement Finance Trust schemes – is the mechanism widely used to build new GP surgeries and other community healthcare facilities. It has so far accounted for £1.6bn of capital spending, of which £1.4bn is for health projects and the other £200m is for co-located local authority services. It has been noticeably less affected by the credit crisis than have PFI schemes. LIFT operates under a different structure of Public Private Partnership, with smaller individual contracts, involving finance of about £5m to £25m per time – much more affordable for lenders.

 

Chris Whitehouse, chairman of LIFT LOBI – the Liaison Organisation for Business Investors – says that although LIFT projects have escaped the worst problems of raising finance, it could still do with further help from the Government to ensure individual schemes still proceed. “LIFT is different to PFI, and as such is not facing funding problems to the same extent, but lending terms are tighter and due diligence has increased,” he says.

 

Our members report that projects remain on track, and funders recognise that LIFT is a solid, secure, long-term investment and remain cautiously willing to invest. Members also report new types of investors including pension funds seeking a secure place to invest. However, we are looking to the medium to long term and working on innovative ways plans to ensure that credit will continue to be available for the LIFT market whatever the length of the recession.”

 

Whitehouse adds, though, that LIFT may also need support from the Treasury to keep projected spending going. So does the bail-out of PFI represent genuinely good news for the NHS? Apart from in Bristol and Fife, not necessarily. And is it the end of the rescue of NHS infrastructure spending? In the midst of this global financial crisis, almost certainly not.