Examination of Witnesses (Questions 375
THURSDAY 15 NOVEMBER 2001
375. Can I welcome you to this session of the
Committee and can I particularly welcome our witnesses. We are
very grateful for your cooperation in this inquiry and for the
evidence you have submitted to the Committee. Could I ask you
each briefly to introduce yourself to the Committee.
(Mr Davis) Michael Davis, Chief Executive of Catalyst
Healthcare Management Ltd, which is the investment management
company for the Catalyst consortium members.
376. And you began life as a cleaner.
(Mr Davis) Not quite, but I wanted to pick up the
point that I had some operational experience in hospitals which
was actually at the ground roots.
(Mr Stone) Tim Stone, I am Chairman of KPMG's PFI
and PPB businessnot an accountant, a banker, but have been
involved in PFI schemes since the very inception in the early
1990s and a number of hospital schemes all the way through too.
(Mr Gritten) Mark Gritten. I am the Chief Executive
of the Royal Berkshire and Battle Hospitals NHS Trust. I have
been with the trust since October 1998.
(Professor Pollock) Allyson Pollock. I have two jobs.
I work as the director of Research and Development at UCLH but
I am here in my capacity as head of health policy and health services
research unit at University College London (UCL).
(Mr Deegan) My name is Mike Deegan and I am Chief
Executive of Central Manchester and Manchester Children's NHS
Trust and have been so since mid-September.
(Ms Jackson) Helen Jackson, Director of PFI within
the same trust. I have been there for two years.
(Ms Herbert) Jane Herbert, Chief Executive of South
Manchester University Hospitals NHS Trust. I have been there for
about three and a half years.
377. Can I begin by asking you, Professor Pollock,
you are, I think it is fair to say, regarded as highly critical
of the PFI route. What we are hoping to achieve with these sessions
is some interchange between witnesses about the different perspectives
of this key area of health policy. Would it be possible for you
briefly to summarise the chief concerns that you have about PFI?
(Professor Pollock) Yes. I suppose I should begin
with a basic principle of the NHS, with which you are all familiar,
the principle of risk pooling and risk sharing in order to achieve
universality. Risk pooling and risk sharing means spreading the
risks and costs of ill health across society, from poor to healthy
and from ill to well. That concept of risk sharing and risk pooling
is actually built into the financial and institutional organisation
of the NHS. Markets and market structures so you start fragments
that risk. It is very important to understand that. Risk pooling
was actually built into the design of the delivery system from
1948, and the risk pool is fragmented when groups, such as the
elderly, for example, are excluded or services such as long-term
care, dental and optical services are excludedor when services
are privatised. For example by using Private Finance. What is
not sufficiently well understood is that NHS capital was issued
from central Government. In the interests of equity it has been
issued as block grant. There has been no requirement up until
1991 for hospitals actually to pay a charge on that capital. It
was a public good. That was in order to achieve equitybecause
after all hospitals could do very little about the estate that
they inherited or the legacy and conclusions of assets. One of
the things about contracting with the private sector is that the
payment includes a charge on capital which you actually have to
pay for out of your revenue budgets. When you contract with the
private sector for services a new claim is made on the revenue
budget, you are making a new charge on that revenue budge. Of
course that is a new cost pressure. It has a number of effects:
it fragments, it distorts the planning process, but it also creates
new inefficiencies. There is plenty of evidence from around the
world, especially from the US, to show that the transaction costs
climb when you start to contract out your services; you become
increasingly inefficient. Transactions costs in the NHS before
the internal market were estimated at around 5 or 6 per cent;
they rose to 12 per cent with the introduction of the internal
market. We know in the States transaction costs are in excess
of 25 per cent. That means that for every penny in the pound,
you are using 25 pence in the pound in transaction costs (using
the US experience of transactions costs). In fact, privatisation
is inefficient in all sorts of terms and there is no system in
the world that delivers a universal health care service on the
back of profit providers. I think it is very important that the
Committee understands that. That is to do with the principle of
risk pooling and risk sharing and risk allocation.
378. Do you have any concerns that some commentators
suggest that the interest in PFI within the NHS is related to
the wider political objectives of the current Government, particularly
obviously in relation to Europe.
(Professor Pollock) Others much more erudite and learned
than myself in economics, including the IPPR, have already shown
there is no macro-economic case for PFI, either in terms of the
public sector borrowing requirement or in terms of the Maastricht
criteria for Europe. So the arguments now rest with the micro-economic
case. The key one which has been given is value for moneyand
I am sure you will want to pursue thathowever, I think
there are other concerns, which is the fact that PFI is being
used as a trail blazer by the Treasury and the International Financial
Services Lobby to promote and sell this model abroad. I have just
returned from Canada where the UK division of PriceWaterhouseCooper
were advising the local government on putting forward a PFI on
hospitals and in schools. They were using their recent report
which has a very flaky methodology to sell it. So PFI becoming
an international tool.
379. Before I bring colleagues in, you are probably
aware that we want to look at some of the issues relating to the
involvement of other witnesses in local schemes and their experience.
Are you familiar with the schemes. I appreciate you have just
come back from abroad and it may be you have not had a chance
to look at the background, to our witnesses, but are you familiar
with some of the local schemes?
(Professor Pollock) No, I have not seen the Central
Manchester business case and I did not know South Manchester was
being called today.