Examination of Witnesses (Questions 400
THURSDAY 15 NOVEMBER 2001
400. But do you accept, when any hospital is
built and it is not built under a public sector scheme, there
is not a great big cheque being given at the beginning of that
(Professor Pollock) There is. There is a massive big
cheque being written for the 30 yearsand more. It is an
401. Do you accept it is not at the beginning?
(Professor Pollock) I do not quite understand the
point you are trying to make. We are writing an open-ended cheque
paying four, five or six times more than we should. The true costs
are unevaluated. Also that we will have to revisit those contracts,
we were going to have to pay more for any small change that is
made to schemes. We are writing an open-ended cheque and it is
not an efficient and good way of using public funding.
402. That is your opinion.
(Professor Pollock) There is plenty of evidence to
show that. And this is not anecdotal evidence, this is detailed
meticulous evaluation with data.
403. We are not at the end of any particular
25-year contract, so we cannot tell. The other thing that happens
is that some risks are transferred. As Mr Stone was saying, if
the roof is leaking, we can save by making the contractor put
it right. Coming back to your other issues about affordability
versus value for money, two separate issues, are you suggesting
that some of those are not done in the process of PFI? Is it affordability
looked at when the health authorities had to sign up?
(Professor Pollock) Yes, indeed, at the outline business
case health authorities are actually signing up on the basis of
affordability: they are saying what they think they can actually
afford. The most notable feature of PFI schemes is the enormous
cost escalation. My own trust UCLH went from £160 million
to £430 million in the space of about a year and a half.
Of course that opens a massive gap when you have got to meet it
from your revenue budgets. Originally it was always hoped that
trusts would achieve the increased costs which we have seen through
land sales, through the capital charges diversion (they did not
realise always that they were going to retain capital chargesand
also through efficiency savings on retained NHS estates). It became
very clear they could not achieve savingsand as you know
we have documentedthere were four major types of subsidy:
one from the centre; the second from regional budgets which were
diverted; the third from local services where budgets were diverted
(often community services and primary care); but the fourth from
the service itself because the affordability has actually, like
the capital charging system, driven down the provision of beds
and supply. That is very well documented with chief executives
themselves acknowledging that.
404. Have we not seen the same sort of pattern
with many public sector schemes as well?
(Professor Pollock) Since 1991 I have no doubt that
the system of capital charging has contributed to the downsizing.
The problem is that capital charges were eight or nine per cent
of budgets.; you are now looking at rising to 20 per cent on average
of budgets. So you are getting a major contraction.
405. You were making the point that about sometimes
spending more on capital delivers a better health service.
(Professor Pollock) If you think it is better to treat
fewer patients. If you would rather serve four people than 10
people. I mean, we are coming now to challenging the notion of
universal access and planning for needs. One of the most striking
things in many of the business cases that we have looked at is
this concept of "turning off trade", where you see massive
decreases in case load being predicted with absolutely no evidence
or basis for it. Norfolk and Norwich is one, Hereford, Worcester.
I can go on citing these to you, where they have actually predicted
massive decreases in case load, and that together with performance
targets has actually justified the major bed reductions which
have accompanied the affordability issues.
406. As one who has worked in new NHS hospitals
built in the early 1990s, I would not like people to think that
PFI is the only way of building state of the art hospitals. The
public sector can achieve it also. Secondly, I would like to go
back to one thing Mr Stone said right at the beginning. The NHS
decides what they want and then tells you what they want and you
provide it. The impression I haveand this is where I want
to bring in some of the managersis that a health authority
decides the amount of money they have got and starts from that
point of view, rather than actually starting from a decision about
need. Is that the experience of our managers here?
(Ms Herbert) Our PFI, we were certainly told at the
outset that we must break even, that we must not spend any more
money on this scheme, and in fact the drive was to reduce the
revenue outlay once we had moved to a PFI.
407. So you started from the amount of money
you had got to spend.
(Ms Herbert) We started from an amount of money and
then we worked the case backwards from the case of need, so that
the two tied up. But may I just say that I do think there is an
issue about the expectation that we are going to get new hospitals
and they are actually not going to cost us any more than the old
ones. I am not quite sure that that is a sensible starting point.
408. No, many people have told us that whether
you get it on the public sector or PFI it is going to cost more.
But you would start from the cash available.
(Ms Herbert) Yes. I do not think that would have been
different had it been a Treasury funded scheme versus a PFI because
we had not made that decision at that stage.
(Mr Deegan) There is a slightly different position
in Central Manchester. I think the whole context has changed from
the early 1990s. If we go back about 18 months or so, when the
Government published the NHS plan, it really heralded the need
for significant investment in the health service. So the approach
we are taking in Central Manchester, working with primary care
trusts and our clinical staff, is to specify exactly what facilities
we need to meet all the targets that have been set out for us
for the next 10 years and in effect work backwards. So a slightly
(Mr Gritten) From the public sector point of view,
the original business case in Reading in 1997 looked to ensure
that the whole deal was self-financing. It was looking to be a
£1 million saving for the investment and to make sure that
the activity levels that were being predicted would be met in
2004. When we reviewed the business case last year, we have been
able to offer a saving on our prices in four years time of £0.5
million, an extra 84 beds, in order to make sure that we can deliver
a scheme that is well within affordability.
409. I just wanted to clear up the question
about how much capital is employed at the very start of the scheme
or in the first couple of years of the scheme, comparing a conventionally
financed scheme versus one that is PFI. Are we actually saying
that something that is paid off over 30 years or 60 years it might
be more in the long run, but what I am asking is this crucial
question: what is the difference to the Treasury at the start
of the proceedings versus the two different schemes? Maybe Mr
Stone would comment and then Professor Pollock will come in.
(Mr Stone) We need to separate what I might rudely
call artificial accounting distinctions from long-run
410. I notice that you clearly said you were
a banker and not an accountant to start with.
(Mr Stone) Indeed. The real issue here is about long-run
use of resources. Whether they are designated because of some
accounting standard capital revenue, I frankly do not care. I
do care and I think the whole process is driven by saying: we
have a finite amount of resources available, let us get the scheme
which delivers the best.
411. That is not really my question because
Professor Pollock's position is perfectly understandable: it is
not worth paying the extra for the longer term. What we want to
know is whether at the beginning the costs are comparable or by
how much the advantage is of having it all funded through PFI.
(Mr Stone) Right. The PFI process does not produce
money out of fresh air. This is not a gift. This is not a grant
from some charitable trust. First of all we are not writing a
cheque for 30 years because we are buying services, and if those
services are not delivered we do not pay for them. That is a fundamental
difference. Secondly, in terms of the long-run costs, however
they be described, there is a huge amount of effort goes into
as honest a comparison as is possible of the two, of the different
alternatives, different bids, different approaches. The one which
is picked in the end is the one that delivers the services for
the best long-run cost, however allocated. It is critical here
to recognise, as I have said, that we are looking at comparisons
of different schemes over a long period of time and we have to
use the best judgment which is available, just as we do in conventionally
procured schemes. This process has started to improve the quality
of data, so our perceptions of reality are a bit better than they
werethey were historically dreadful and most of the economic
analyses you look at from, I suppose, the mid 1990s and before,
the further you go back, the fuzzier the data gets in terms of
quality and the analyses at the time. The process is undoubtedly
about delivering these long-run costs and the evidence we have
is that the process is getting better. It is delivering value
for money and it is reducing long-run costs.
412. That is not really what I am asking. If
you were the Treasury sitting there at the beginning of the whole
process, which costs more?
(Mr Stone) From the Treasury's point of view, the
PFI process costs less.
413. Significantly less?
(Mr Stone) Sufficiently significantly less that they
are clearly happy to release control. Traditionally, the Treasury
sits there year on year and controls the budget year on year,
but by signing up to one of these deals they are saying, "We
believe that letting go of control for the next 30 years on this
deal is worth it in terms of the improved long-run use of resources
to the nation." That is the Treasury judgment. It is not
an off-balance sheet fudge, it is a clear decision in their own
mind between releasing instantaneous control in favour of long-run
value. That is very clearly done.
414. Can you quote some figures for one scheme?
(Mr Stone) Rather than quote numbers which are NAO-type
numbers, because we believe the numbers are pessimistic, our intuition
from the work we have done, the data we have seen, the analyses
which they have been subjected to, is that the VFM in the NAO
report was around 5 per cent, but we think it is nearer 10 to
15. The Treasury's view is that these things are understated and
that is our understanding as well. So their strongly-held perception
is that these schemes do deliver much better value for the taxpayer
as a whole in the long-term at the very outset, otherwise they
would not let it go.
415. Sure, but Doug Naysmith was asking about
those first two years, say, out of the 35 years. Surely there
is no question in Treasury terms, you would have to agree, that
to the Treasury in year one and year two the cost of the PFI has
to be massively less on a major hospital?
(Mr Stone) Yes, but that is not the way decisions
Julia Drown: No, but that is what he was asking.
416. I am interested in what Professor Pollock
would say on that because she has studied this.
(Mr Stone) Sure, but that is not the basis for the
(Professor Pollock) There are two types of cost. There
is the cash cost, and we do not even know the true cash cost because
we do not know the true volume and value of land sales and all
the different grants and sweeteners which are put in. For example,
many PFI schemes chuck out the equipment because of the affordability
problem and the NHS then gets left with the equipment budget.
The second issue is that these may be cash costs which may be
of short-term benefit to the Treasury but you have to
417. But they add flexibility to the whole system.
(Professor Pollock) How do they add flexibility?
418. Because you have money you have not spent
which you can spend on something else.
(Professor Pollock) Where is the evidence that it
is being spent anywhere else? There was a £26 billion surplus,
where was that being spent? The other thing is the public cost,
the distortion in the provision of public services. We know the
costs to the public are enormous in the down-sizing of their services
and the increasing fragmentation and the real affordability problems
that hospitals are now facing; massive public costs.
419. Can I bring Mr Davis in? Where do you stand?
Presumably you are supportive of Mr Stone?
(Mr Davis) I think I would say I am now becoming a
veteran PFI practitioner, and I have listened to this theoretical
debate with great interest because we are beginning at last to
identify the real cost of running public services and it is not
being accounted for. If you start with rubbish, you end up with
rubbish. If you take the public sector comparator it does not
take into account the true cost of funding NHS superannuation
schemes, for example. I am told on good authority there is an
unfunded liability of somewhere around £75 billion in employee
pensions in the NHS, and that crystallises when it is transferred
to the private sector. The backlog maintenance in excess of £3
billion is a measure of how unsafe these facilities are, so the
NHS has not been a very good custodian of its public assets. The
depreciation policy is to depreciate these specialist technical
buildings over 60 years, when in real life they have a much shorter
life than that and the private sector in its bid probably has
to depreciate over 30 years. It is a point which has been touched
on already, new technology has a cost to it but it also needs
to be replaced on a regular cycle. There is no way the PSCs are
taking this into account. So if you start with an under-cooked
PSC, you end up with an affordability problem. What I would like
to see is that Government policy as the benchmark against which
the public sector comparator is costed. That is about improving
the quality of the environment, introducing new technology, better
standards of facility, better standards of care, better terms
and conditions for the ancillary staff. I was rather struck by
the similar views we had to Unison when they gave evidence last
week. We agree, PFI is changing behaviour and we think it is the
right way to do it. We think the PSC is a necessary tool but there
are some macro-problems with it in that it does not take into
account the real cost of providing public services, at local level
it is subject to very wide interpretations and possibly heroic
assumptions about the efficiency gains, some of which we have
touched on. So affordability is a concept, not a reality. If there
is to be modernisation of the NHS, real affordability tests have
to be brought in which will meet Government policy.