Private finance Initiative firms 'fleecing' the NHS

12 April 2012

Private profits from public-sector hospital and school projects under the Private Finance Initiative have swollen by hundreds of millions of pounds as a result of debt refinancing, according to a report by an MPs' committee published today.

But the public sector's gain from the refinancing deals has fallen around £100 million short of Government predictions, said the report from the House of Commons Public Accounts Committee.

The committee warned that negotiations on PFI projects were left in the hands of local government officials who were "often painfully lacking in commercial experience" and urged the Treasury to take final responsibility for approving sensitive refinancing deals.

Doctors' representatives said the report showed how PFI was allowing private companies to "fleece" the NHS and said they would urge Tony Blair's successor to scale down its use.

But PFI was defended by the Treasury - which said taxpayers had made "significant" gains from a new system for sharing benefits from refinancing deals - and the Confederation of British Industry, which said refinancing was an "efficient, market-driven mechanism".

Under PFI, public-sector projects are funded by debt and equity raised by private companies, which aim to make a return over the life of the contract - often 30 years.

Refinancing deals allow the firms to obtain improved terms once the project has got under way - for instance, by securing lower interest rates on debts once the risky construction period of the project is completed.

Today's report stressed that such deals were a normal and expected part of the PFI market.

But it highlighted deals which have allowed PFI investors in projects such as the Norfolk and Norwich Hospital, Bromley Hospital in Kent and Debden Park School in Essex to increase the rate of return on projects from around 15 per cent-30 per cent to 60 per cent-70 per cent.

The report said: "Some of these early refinancings... generated very high rates of return to the private sector investors and additional risks to the public sector in the form of higher termination liabilities and extended contract periods...

"The examples of high investor returns within a few years of contracts being awarded, combined with added risks for the public sector would... suggest that value for money is not being optimised."

In 2002, the Government introduced arrangements for the proceeds from refinancing deals to be shared between the public and private sector. But so far the Government has secured only £93 million under the arrangements, compared to the £175-£200 million predicted by the Office of Government Commerce.

PAC chairman Edward Leigh said: "Local public sector officials taking forward PFI projects such as hospitals or schools are often painfully lacking in commercial experience. The ill-conceived Norfolk and Norwich Hospital refinancing in 2003 demonstrated this all too clearly.

"Staff negotiating the fine print of refinancing clauses in contracts, where the risks to the public sector can be high, must be trained so that they are not outwitted by their commercially-sophisticated private sector counterparts.

"Proceeds gained by the public sector from PFI debt refinancing under the voluntary code for the sharing of gains are currently well short of expectations. It might be that the code as it stands does not encourage smaller refinancings.

"A sliding scale of sharing of gains might encourage more refinancings with benefits to both public and private sectors.

"There is no requirement for the gains made by investors through selling on their shares in PFI projects to be shared with the Government. The Treasury must keep the working of the PFI equity market under close scrutiny to make sure the public interest is not being compromised."

The chairman of the British Medical Association's consultants' committee, Dr Jonathan Fielden, said: "This report confirms what the BMA has been saying for many years - that PFI is an expensive way of borrowing money which stores up debts for the future and drains funds away from the NHS into the pockets of the private investors.

"We can see just how damaging this is as so many NHS trusts are currently crippled with debts and are struggling to meet PFI repayments. This is already directly affecting patient care.

"It is appalling that the Government let these negotiations go ahead allowing the private sector to fleece the NHS.

"The BMA will be urging the new cabinet to move away from wasting large sums of money in private sector deals which have been shown to offer poor value and can leave hospitals heavily in debt for decades."

A Treasury spokesman said: "The taxpayer has derived significant benefits from the Government's introduction of a voluntary code and 50/50 gain-sharing for PFI refinancings.

"The Treasury supports refinancings only where they offer value for money. Although there is no current evidence that the secondary equity market is working ineffectively we continue to monitor developments in the market, both with other departments and with key investors."

Dr Neil Bentley, CBI director of public services, said: "As the report acknowledges, refinancing is part of an efficient, market-driven mechanism. It is not some sort of pernicious attempt to grab extra profits and does not place any additional burden on the taxpayer.

"The poor level of commercial skills and experience in the public sector is a real concern. The answer is not, however, more centralisation or increasing the level of Treasury interference. Instead, departments must learn the lessons from existing projects, improve public sector skills and training, and negotiate improved contracts that reflect the experience of PFI to date."

Liberal Democrat Treasury spokesman Vince Cable said: "This report highlights all too clearly the lack of commercial awareness of public sector organisations negotiating PFI deals, and the result on the public purse."

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