Examination of Witnesses (Questions 380
THURSDAY 15 NOVEMBER 2001
380. Can I raise a question with you on this
very international financial direction in which we are going.
In the past those services which have been provided essentially
within the private sector have been outside the remit of the World
Trade Organisation. As we move increasingly to a mixture of public
and private provision in public services such as health, is there
a danger that the whole provision of health care becomes subject
to rules and regulations of the World Trade Organisation, opening
up our health service to bids from competition from maybe the
major American health care group organisations?
(Professor Pollock) There is definitely a danger.
The WTO is an organisation whose sole remit is trade, opening
up markets to trade. They operate through a number of trade treaties.
The most serious with respect to health and education and welfare
is the General Agreement of Trade and Services (GATS). That trade
treaty is currently being negotiated. Countries have the ability
to opt in. The problem is that when they have actually already
opened up their health services to the market place, to corporations,
they will now become very vulnerable and will actually become
subject to the rule of the GATS. This is a highly contentious
and topical issue. I have just returned from Taiwan, where the
Ministry of Health is most concerned about the effect of joining
the WTO and the GATS, and similarly in Canada, where opening up
both the funding and the delivery system to the private sector
means that they will now be exposed to the rules of trade which
come before public health.
381. Why do you think there has been so little
attention drawn to that?
(Professor Pollock) We have published two articles
in the Lancet to which I draw your attention. Partly because these
are very technical trade treaties. I think there is also an issue
that the Department of Health and the Department of Education
have not been sufficiently involved in their negotiations. It
is led by the Department of Trade, whose sole remit is opening
up trade and markets in services and there is also a very large
business lobby. There is very good evidence from the US, for example,
that the business lobby and the government see the opening of
health care systems as "absolutely essential to their profits".
In their quote, not mine, they see Europe as a "great unopened
oyster" in terms of education and health. If you think, this
is big money at stakemost countries are spending anything
between 12 and 20 per cent of their gross domestic product on
health and education. These services have hitherto been protected
from the market place. These services are now being opened up
at local level with new structures being put in place and they
are exactly what the corporations and some of their governments
are actually targeting, because economic success will rest on
being able to open them up
382. Are you essentially saying that whatever
the protestations of any government, we are on the path of privatisation
of our health service as a result of those changes?
(Professor Pollock) No, there are two processes taking
place. One is at the level of the World Trade Organisation, where
policies are being written, new constitutions are being written
for countries which will override domestic sovereignty in these
issues. At the other level, countries themselves are pursuing
an agenda which is liberalising and opening up public services
to trade. These are two parallel agendas that are taking place
but both will have the same disastrous and devastating consequences
for public health. I will draw your attention to the TRIPS Agreement,
which is on trade related aspects of intellectual property, and
access to essential medicines in the developing world. TRIPS is
a trade treaty which had disastrous consequences on the developing
world and yet when the US Government finally stepped in and threatened
to actually break the patents during the Anthrax scares this led
to the WTO softening that trade agreement. But that is what we
are going to be up against if we allow further privatisation and
our participation in GATS to override public health concerns.
383. We as a committee are trying to ask what
I think should be a very simple question, with a very simple answer,
and that is entirely the question of best value. We are told absolutely
clearly by Mr Milburn and his advisors that PFI is best value
full stop; we have KPMG here who are saying, "Acute hospital
PFI schemes overall have represented good value for money for
the public sector"although they water it down a little
bit later on by saying it is marginal; and we have Professor Pollock
saying exactly the opposite. How do we as a Committee find out
which is correct?
(Professor Pollock) I think there is a lot of confusion
being sown over value for money.
384. Absolutely. We want somebody to cut through
(Professor Pollock) I will try and help you.
385. In all fairness, I want both sides. I want
to hear KPMG as wellas I am sure our Chairman does.
(Professor Pollock) If you think of it as a political
exercise which comprises political judgments, be it dressed up
as objective economic criteria. VFM is actually a political exercise
with political value judgments which are required to provide the
right answerswhich in this case is privatisation. Value
for money is an economic analysis. It is not a cash analysis,
so it does not tell local trusts what the affordability is, ie
whether they can actually afford the new scheme. I put it to you:
a Porsche or a Ferrari might be value for money for you, or an
Armani suit, but you may not find that is affordable, so therefore
it is not affordable. That is the real issue. VFM is not a science
but a black art, as we have shown. But it is often presented very
misleadingly because the value for money figures tend to be the
ones that civil servants, sometimes chief executives, sometimes
even directors of finance present to their boards and to the public
in terms of efficiency savings and affordability. As the Government's
own guidance says, "these two issues of affordability and
VFM must be considered separately. Value for money is an economic
analysis with two elements, discounting and risk transfer."
I can go into the two parts but that would only serve to confuse
you. I think it is very important that you consider the issues
of affordability and risk transfer separately. You are absolutely
right that value for money analysis shows very little difference
between the PSC and the PFIfor instance, in the public
expenditure memorandum the effect of using a too-high discount
rate of 6 per cent, which was agreed to be generally too high,
did not actually change the value for money case, it still left
it in favour of the public sector comparator. It was only by adding
in risk transfer assumptions that the value for money case came
out in favour of PFI. When you look at the actual NPVs, as they
are called, there is almost no difference. It is less than one
per cent. In the case of Swindon, for example, the NP figures
were £1,311.3 million for the public sector comparator compared
with £1,310.6 million for the PFI. So this is very arbitrary.
I put it to you; if you were deciding as a contractor you would
not make decisions on the basis of a less than one per cent swing
in the total value of the project.
Chairman: We might be looking in practical terms
at some of the schemes in a moment or two.
386. Perhaps we could hear from the other side.
(Mr Stone) I actually agree wholeheartedly with one
of the things which Allyson said which is the need for the separation
of value for money and affordability. They are two separate fundamental
differences. Let us start with the background to the process.
I actually dispute fundamentally that it is a political exercise
because much of the lessons that are being applied here I know
are being applied very carefully in the private sector as well.
Is not just a political issue, it is about standing back and saying,
as a matter of principle: you the Government set health policy,
you decide what it is that you want to be delivered to the tax
payers and to the voters. Then the question is: "How best
can we deliver that?" If the problem were of a size to be
capable to be held in one person's brain, it would be wonderful.
It is not. We do not manage any part of our economy en bloc; we
manage it in manageable bits. The PFI processing, so far in acute
health schemes anyway, has looked at the infrastructure, the serviced
infrastructure. What it has looked at there is: given what the
health service says it wants to be delivered, what is the lowest
use of resources in the long run for the nation as a whole to
deliver to that standard of service? The whole process is working
back from a definition of level of services to how best can we
deliver it. It is not a dogmatic process that says: Thou shalt
do it precisely this way. The process has been engineered over
time to take in improvements. It is fundamentally about saying:
the minute you take a decision to build a hospital, you have just
taken on 30, 40, 50 in some cases hundreds of years of liabilities.
Like it or not. We have no accountability in the public sector
for the consequences of those decisions historically. We have
a public sector which is in general not trained, measured or rewarded
to manage risk, but yet put in a position where they have to do
over time. All that the process is saying is: be cognisant of
the long-term consequences of your decisions; force as much as
you can the process to be focused on delivery of outputs; and
get your hands off the details. Let those who are best able to
produce the solutions, whomever they may be, public or private,
come up with the right answer. The value for money case which
is generally visible is in our experience and our view a very
pessimistic case, for all sorts of reasons. Firstly, the availability
of data, of honest data in terms of what it actually costs to
deliver health care in any of the areas in the traditional mode,
is just not there. The data is very difficult to get hold of.
That data which you can get hold of points to a broad conclusion
that all the analyses to date are significantly pessimistic, so
when we talk about three or four or five per cent it is probablyand
again I can only go on the data that we have seenprobably
more like 10 or 15. It is a completely different measure altogether,
but nonetheless the process has been very careful to be prudent,
to be careful, and to try and develop a process where we learn
from our experiences all the way through and we bring as much
best practice in as we can. So far there have been 24 schemes
signed to date. It will be a number of years before absolute copper-bottom
proof is available that this method works rather than another.
However, what I can say is that, with few exceptions, those people
who have actually seen the inside of the schemes in gory detail
- and I really do mean the inside of the schemes (and you might
like to talk to people like Mike in a second about that)there
is a much more open and honest approach to these mechanism and
a much greater visibility of the true costs. Everything that we
have seen leads me to state quite confidently to you that the
process does actually work and it is getting better. But what
we need is honesty. We need honesty in debate, in what it actually
costs now. The fact that, for example, there are hospitals in
this country which we have worked on where patients were moved
from A&E across to wards on the back of electric milk floats
over a car park. The great British public has a stiff upper lip
and deals with it but we never look at the long-run costs of these
sorts of things. We never look at the long-run cost in one year
because of budgetary issuesand we will come on to affordability
in a second. Because of budgetary issues, an estates chap may
decide not to mend the roof this year but to put it off for three
years. It does not cost inflation extra; it costs all the dilapidation
and the damage to the health care process inside as well. That
stuff gets lost. It is first and foremost about getting the honest
analysis, and then, when it comes on to affordability, what you
are talking about there is micro-managing budgets. It is not about
taking the revenue budget and paying for this, that or the other.
That is fundamentally economically irrelevant. It is about allocation
of resources. It is about: do we produce a process which delivers
the required services to the lowest long-run use of resources?
Or do we fudge it? And we have fudged it in the pat because we
have not had visibility of the process or the data.
387. One of the areas of concern of Professor
Pollock is the entire direction that PFI is taking us inand
as someone who personally has reservations about the Government's
increased use of the private sectorand what that means
for our concept of the collective health care system. I was interested
in your evidence where you are arguing for pilot projects involving
clinical and near clinical services. The fears that Professor
Pollock has about where this will lead to, your evidence in a
sense undermines those fears. You are arguing that we should go
much further than the current boundaries.
(Mr Stone) I would like to see evidence. At the moment,
the boundaries to which the system works are politically inspired
(politically with a small "p"). There is a boundary
that says: this is how far the process can be referred. I would
actually like to see some experimentation and some real investigation
as to whether value for money could be improved by knocking down
the artificial boundaries. From the bits and pieces we have looked
atand, again, there are very few schemes that have gone
very far in this direction so far, but I think you will be seeing
next week West Middlesex and Quest, so you will get some evidence
there to have a look atmy only plea is actually not one
of saying ,"I want it to go in this direction." I would
actually like people to take an honest, data driven, evidence-based
approach to it and not to be dogmatic and simply to look at how
best we can facilitate the delivery of health care in the long
run. If the answer is: "Keep as it is," that is fine.
But at the moment we do not have an open and honest debate; we
have a very frustrating debate which is essentially much more
emotion and dogma and very little fact in many cases. Such factors
are visible. For example, the VFM numbers. You need to look very
carefully at what those numbers mean and where they come from.
It is the old: lies, damn lies and statistics. With much of the
numbers that are floating around in this, unless you actually
understand where the money has come from, it is very difficult
to interpret them. And that is a big issue.
388. You said in your evidence that the PFIs
led to a higher standard of hospital accommodation than under
the conventional route. Why?
(Mr Stone) So far it is entirely anecdotally. If you
talk, as we do to our clients, they are saying that the hospitals
they are seeing producedand Greenwich is an exampleare
at a standard and quality that they have never seen before in
the public sector. It has to be at this stage anecdotal evidencebut
actually I do not think that is necessarily in any way weakerthat
the few that are so far openedand remember these are still
early schemes, so you have not seen anything like the benefits
that will come through over timethe early schemes, such
as Greenwich, are clearly, in the minds of the practitioners in
389. You cannot tell us why that might be?
(Mr Stone) I think it is quite clear, it is that as
a matter of basic mathematics the more constraints you put on
any process the worse it will be. You cannot make a process better
by constraining it. What has happened in the early PFI deals is
that many of the constraints have been taken off, in that we have
not simply said
390. If I am comparing to a conventionally funded
route, would I find more constraints on a conventionally funded
route? You could argue that there are less constraints.
(Mr Stone) It is constraints in terms of saying: there
are an army of skills out there which the public sector has traditionally
used (the construction companies, the service companies and so
on, the architects). What traditionally has happened, again from
our experience, is that there has been a very tight control of,
"I want slate roofs, I want 6ba bolts holding the doors on,"
and not saying: "I want a hospital that delivers these services,
I want a hospital that works, that allows these different clinical
units to inter-operate." For example, these days the whole
PFI process involves, for example, putting out plots of clinical
adjacencies (who works close to each other), and we let the architect
or the designer stand back and say: "Here is my best guess."
Historically what has happened is there have been much tighter
constraints. They have been constrained in terms of saying, "I
want my corridors exactly so many feet wide," but they have
not said, "How best can we do it?" Part of what has
helped has been the relaxing of those constraints. In general,
I think, provided that we remember that the starting point is:
we are trying to deliver health careor whatever it is -
we are trying to deliver somethingbecause assets on their
own are valueless, we are trying to deliver a service, what are
the necessary and sufficient constraints that we have to impose?
And then: let us produce the best solution. That is fundamentally
what we are trying to get to.
391. Now we have learned that, do you agree
that that could then be transferred to the future public sector
funded projects, that that same relationship could be developed?
(Mr Stone) There is undoubtedly a great deal of scope
for the improvement of skills in the public sector.
392. But it is not the public sector, though,
is it? It is the private sector which builds hospitals whatever.
(Mr Stone) No, but skills can be transferred. In the
long run, the real issue here is getting the right skills for
the right job and the right experience. We have a system at the
moment which actually damages the skills. For example, there are
lots of chief executives of hospitals and finance directors and
clinicians who have been through 24 schemes so far. Very, very
few of them take the experience they have learned on that and
reapply it. There are two examples I can think of that have: the
project director from Greenwich is now working at Roehampton and
there is a scheme up in the north-east of England where the finance
director has done two schemes back to back. The re-use of that
expertise is spectacular. It is bliss for us because we then have
a lot less grief to go through but it is real value for the public
sector. It is important that as the apprenticeship process happens
within the public sector, when people learn how to do these different
types of roles, that it is captured and not frittered away by
moving people around artificially.
393. I think you said that it was probably in
1991 that the charges came in, so that for the first time there
was a charge for the capital for trusts. Then you said that because
of the PFI there was a charge for the capital for the first time
for NHS trusts. Is the problem the capital charges or is it PFI?
(Professor Pollock) I think there are two problems.
I think it is the problem of the switch to debt financing. As
I have said, before 1991 for 40 years NHS capital was funded by
block contract grant. The evidence showsand we have published
a table in the BMJ more recently that you probably have not seen
yetthat the effect of capital charging was absolutely catastrophic
at local level because, although the net effect was supposed to
be no leakage from the system, and cash neutral, at local level
trusts treated this as a real cost. In fact, for six years between
1992 and 1998 they could not break even, they could not meet that
six per cent that was required. The trusts responded by perceiving
this as a real cost pressure. They had very few alternatives if
they were not going to cut the staff budgets immediately. What
they could do was to increase prices, but that was then at the
risk of not being competitive; secondly, they could get into debt,
but then chief executives would not get their performance related
pay, etcetera; and, thirdly, they could cut services by disposing
of asset and estatesand we know that there was a major
disposal of estate. Trust Mergers were one way of disposing of
NHS estate, but also between 1997 and 2001 13,000 NHS beds have
closed. So capital charges on their own had a major effect because
the effect was to take capital investment as a national responsibility
and devolve that to trust level. Now the problem was that when
PFI came along it compounded that because of the affordability
issue. On average trusts were spending about 8 or 9 per cent of
their income on servicing the capital charge. What we can see
from the public expenditure memorandum is that is rising dramatically
to nearer 20 per cent, so that is a major cost pressure. For Dartford
and Gravesham, for instance, it was 7.5 per cent of income, rising
to 27 per cent of income. So PFI really compounds affordability.
394. I know that is one of your concerns, that
because schemes are spending more capital, it therefore has to
be saved, particularly on clinical staff. Is it not true that
throughout the NHS there is capital scheme after capital scheme
which indeed does impose capital charges and in one sense is paid
for by savings on clinical staff? That is things like the ward
re-configurations, MRI scanners (which mean that patients can
be seen more quickly, you need less radiographers, you need less
clinical staff and it is a better service for patientsand
given the shortage we have had of staff it is actually good).
We save some money on staff and, yes, we spend it on capital but
if it is a better service it is a good thing.
(Professor Pollock) I am not quite sure I understand.
You were saying, first of all, there is a historical dearth of
capital and, you are absolutely right. Secondly, trusts have often
tried to sell land or use their revenue to fund capital for example
equipment. That is absolutely true and that has introduced real
distortions into the system where the revenue budgets have been
diverted to capital schemes at the expense of services and staff.
However, we are talking about something completely different.
395. You do not think trusts should dispose
of assets they are not using in order to improve the service?
(Professor Pollock) Absolutely. You want proper asset
disposal, but one of the rationales behind launching capital charges
was that trusts were inefficient. There is absolutely no evidence
they were inefficient in their trust disposal. That is the first
thing. The second thing is that the effect of capital charges
was that trusts underspent on their capital budgets because they
were frightened to increase their capital charge. I think they
underspent by an average over £200,000 per year. Thirdly,
there was a rise in the backlog in maintenance and repairs. These
were all indirect consequences of capital charges.
396. Do you accept the point that sometimes
in the NHS it is good to spend more on capital and less on medical
staff because it gets a better service?
(Professor Pollock) I accept the point but not from
the revenue budget. When you do it from a cash restrained, under-resourced
revenue budget, you should not be using that for your capital.
You should have proper capital flows and a proper system of capital
397. So, basically, even if this committee recommended
complete abandonment of PFI, you would still have all the same
concerns from the public health perspective.
(Professor Pollock) I would. I think debt financing
is not the way forward; you need to go back to making this a national
responsibility and it needs to go back to government grant.
398. You mentioned about the internal market,
suggesting that the increased costswhich were substantial
on transactions therewere in some sense linked to money
going out of the system in privatisation, but the internal market
was not; that was all internal on NHS funds.
(Professor Pollock) First of all, capital charges
were non-transparent, because money goes to purchasers and then
providers have to load their prices with what they think the cost
of capital is, but there has never been any evaluation of capital
charges in terms of the winners and the losers nor the formula.
When I was talking about money leaving the system I was talking
about the effect of privatisation. We know that is again another
unevaluated piece of work. There is one paper on fund holding
which shows that one of the things that fund holders did was to
subcontract services either into the independent acute sector
or for example chiropody or physio services. Once you start to
subcontract for services to the private sector from your revenue
budgets, you are including de facto a cost for the administration
costs and the cost of capital. So leakage occurs but the problem
is we do not know how much because there has been no monitoring.
399. You spoke about money leaking out of the
system. Do you accept with a PFI project that, yes, the money
leaks out, but you get a huge leakage in at the beginning when
the building is built on a PFI and not through a public sector
(Professor Pollock) No, I do not think so at all.
This is the point that the IPPR have made. PFI is not net new
investment. It is not a source of new money. The £14 billion
that have been used in PFI could have been funded entirely from
the Treasury surplus which was running at £2 billion. PFI
has to be paid for and it is being paid for every year over the
next 30 years.