Select Committee on Health Minutes of Evidence


Examination of Witnesses (Questions 460 - 479)

THURSDAY 15 NOVEMBER 2001

MR MICHAEL DAVIS, MR TIM STONE, MR MARK GRITTEN, MR MIKE DEEGAN, MS HELEN JACKSON, MS JANE HERBERT AND PROFESSOR ALLYSON POLLOCK

  460. We as a Committee have a right to have concerns about the kind of company which may seek to get involved, do you think there is an issue about being fit to carry out this kind of work?
  (Mr Stone) No, I think what is important is that as the process is created, and there are some pathfinders under way, the process itself is properly open and robust and that there is proper credit given for competence of organisations in their ability to deliver the services which are involved and manage the risks involved, just as had been the case in the overall approach to the PFI process. What is most important is to make sure that we do not just take the first project in London and lock the model up but we learn from the experience and develop that. One of the aims clearly has to be one of helping the industry as a whole grow and increase the security of supply and competition.

  461. Turning to Mr Davis, I noticed in your evidence there were concerns about the limited size of the PFI market for health schemes and that more needs to be done to stimulate the size of the market.
  (Mr Davis) Yes.

  462. Does this mean it has got more than it can cope with in the acute sector and the primary health sector is a step too far and something which will remain undeveloped?
  (Mr Davis) Talking for our organisation, we are resource-constrained for the NHS PFI projects and we are concentrating that resource on helping to provide acute facilities. In the next few years we would not be looking at LIFT-type arrangements, although I hope to see this change, but that is a capacity issue.

  463. Mr Stone is talking about lessons learned, does that mean companies are coming in which have not learnt lessons and we will have to go through the whole painful process again in primary care?
  (Mr Davis) I think that reinforces Mr Stone's point. The NHS is learning, and there is a lot of internal know-how which has come from acute sector PFI procurements which will beneficially move over into LIFT. On your point about the capacity of the market, there is an issue, not so much about the absolute capacity of the market but about the timing of the deal flow, to put it crudely. If they all come at once—and in the next six months we expect somewhere around 8 to 12 major PFI schemes coming on to the market—that is going to cause a problem. So the capacity is there if there is a smoothing of the deal flow into the market.

  464. Can I turn to Professor Pollock and put some of these issues to her. I know you have written on this issue quite recently. Primary care facilities have traditionally, on the whole, been privately owned, often by individuals acting together in some cases, and there is no change here in terms of the principle of private sector ownership of it.
  (Professor Pollock) Yes, we wrote a series of three papers in the BMJ on primary care earlier this year pointing out basically primary care had always had a system of debt finance, public finance originally and then it was privatised in 1989 and sold to the Norwich Union. We are talking about a different kind of ownership. You are absolutely right, it is one of the Achilles heels of the 1948 NHS that primary care services were not brought into the public domain and public ownership, and that has always been a battle and it has always been recognised as one of the fundamental weaknesses of the NHS that GPs are independent contractors. I think the last survey showed that 80 per cent of the primary care premises were owned by GPs and then they are paid a rental income for their practice premises. That has always been a major problem, although it has been dealt with by capping the budgets, so GPs have not been able to exploit it unduly although they have had a nest egg, it is true, on retirement. We are now looking at major change, and it is a major shift to privatisation we are documenting. One of the really regrettable things is how little data has been collected by the Department of Health, that is evident in the public expenditure questionnaire, on primary care premises, the new ownership arrangements, the changing patterns, the scale of the debt, the scale of the loans and the debt servicing and the implications for the revenue budget.

  465. Everyone would accept that the facilities are very poor.
  (Professor Pollock) Yes, many, not all.

  466. Not everywhere but there were examples of very poor quality services in inner cities particularly. We need a mechanism, I think, to bring those up to standard quickly, is not the LIFT scheme providing a way of doing that? Would we want to transfer these facilities so they are under the responsibility of the NHS which would then have that headache of taking on the maintenance and up-keep of the primary care facilities across the country?
  (Professor Pollock) These are political decisions, how you decide to fund your capital investment. There was an episode in the 1960s when local authorities were actually financing and funding primary care premises with great success for the local community, for the staff and doctors, and in fact doctors working there wanted a salaried service. The issue is that primary care inner city premises on the whole are pretty appalling so how are we going to fund and finance them. LIFT is a completely opaque mechanism, the transparency and accountability are not at all clear, there are almost no data coming out of there, and the guidance to GPs is almost negligible, and the issue then comes back to the whole planning process, how are you going to do a needs assessment and what is the best way of funding it and the most efficient way of doing that. So it comes back to your principles. I put it to you that the problems we have seen with PFI in acute hospitals are going to be exacerbated a thousand fold when you look at very complex primary care schemes. One of the other things that primary care schemes are doing is project-bundling, they are wrapping up other services and other facilities. Some of it includes commercial enterprises but other bits include local authority services such as welfare offices or libraries and social services. What happens if and when that project fails, where does the risk get held, who is accountable for the flows of funding, does the public sector have to come in and pick up the risk when the income fails, say, from a commercial project and we have an economic downturn? All these questions remain completely unanswered. I think LIFT and PUK are deeply worrying, they are removed from Government and we have no proper mechanism for scrutinising what they are doing and what data they are collecting.

  467. I get the impression there are a range of models which might be possible in this area, and if primary care trust holders contract with private sector providers to bring together a range of primary care providers on one side, would that not help solve the problems about GP recruitment, in that they would not have to take a property stake, and also would it not be more convenient for patients if there was a mix of retailers as well on site, like pharmacies? It strikes me to dismiss it totally is a bit premature.
  (Professor Pollock) You are starting off with the assumption that the best way of doing this is using private finance. I think you have to challenge that notion, you have to start with a needs based approach. What are the needs of the population? How are they best served? They are functions which have traditionally sat with health authorities which are now being dismantled and abolished. One of the concerns is how that is going to be approached. The other problem is, of course, as you rightly point out, the major shortage in GPs' supply with a lot of retirements which will be taking place in the next five to ten years. I put it to you, if you start with a decision about how you are going to use private finance, the distortions and dislocations you have seen, already will be accelerated and perpetuated, fragmenting a dividing in the NHS.

  468. It means they could spend money elsewhere in the system.
  (Professor Pollock) You would have to spend much more if you use private finance.

  469. They do not have to spend money up-front, so they may have more money to spend elsewhere. Does it have no merits at all?
  (Professor Pollock) Absolutely not. You are missing the point. The NHS has traditionally funded capital from a capital budget, PFI payments have to be made from their revenue—

  470. But capital is always going to be limited, is it not, in whatever world we are in. If it is always going to be limited, everybody cannot have their new primary care hospital—
  (Professor Pollock) No, they cannot.

  471. So in that world, why is it fair to have one town getting it and one town not?
  (Professor Pollock) It absolutely is not fair, but what you are basically saying is that you are going to devolve these investment decisions to a local level. The real issue is that these investment decisions then have to be met from the revenue budgets at local level, that puts a major pressure on the revenue budget, then you end up squeezing and cutting services, introducing private health insurance, introducing more private sector care and also redrawing lines of eligibility. Do not forget, the NHS has just seen guidance restricting NHS care to six weeks for intermediate care. So care trusts are going to come under an awful lot of pressure to do rationing as a result of the major pressures on their revenue budget, and they do not even understand the income streams they are inheriting. Primary care trusts are not actually equipped or set up at the moment with the expertise to understand the financial implications of what they are inheriting, whether it be PFI in hospitals or PFI in primary care.

Julia Drown

  472. I think you said that you recognised that many GP practices have been in the private sector ever since 1948.
  (Professor Pollock) Yes.

  473. Much of LIFT is designed to help GP practices reinvest in themselves or relocate. Insofar as the planning considerations are concerned for GP practices surely the argument does not hold so much insofar as there is not a change? It might be you have always liked it in the public sector but at least there is not a change. Can you produce evidence to show that the part that GP practices have been funded privately has led to any increase in private insurance in the way you have just suggested would happen?
  (Professor Pollock) The GPs have had proper rental incomes to pay for their PFI, so they have actually had a separate income stream to pay for that. There is no doubt that the switch to fundholding again was unevaluated but I speak to many GPs who say that the first thing they do is to check whether their patients have got private insurance and encourage them to use it, because they realise when they are working under cash limited budgets that is in their interests, and that especially happened under fundholding.

Chairman

  474. You are talking about GPs in London, I presume?
  (Professor Pollock) And inner city areas. Even in inner city areas they are encouraging their patients with private health insurance to use it. But the fact is there was an identifiable income stream. The problem was when the interest payments rose and they got into real financial difficulties in the early 1990s, and nobody knows how they managed that, nobody knows how that was managed.

Julia Drown

  475. But in terms of planning there is no difference with what we had before?
  (Professor Pollock) I think there is a fundamental difference. You are talking about a major reconfiguration in primary care rather than an unfortunate inherited status quo. You are looking at massive change in the provision, in the location and in the planning of services.

John Austin

  476. Professor Pollock has referred to the change in the system of financing which came about in the NHS. Some of us have a background in local government, and in local government capital borrowing was always paid for, and in that sense the NHS was different from local government. At some stage we did have a freedom in local government, until the Thatcher-Heseltine era, to make revenue contributions to capital and not borrow, but if money was borrowed it was borrowed and the interest was paid at the full rate. In the rest of the public sector one assumes that any borrowing comes through the public sector works loans board and a charge is made. The problem for the Health Service was that would have been a charge somewhere within the corporate budget but it was applicable to the health authority that was actually doing the borrowing. When the change came about, suddenly health authorities had to pay interest on their capital, presumably adjustments were made to their budgets to take account of that change. I appreciate that around that time interest rates went through the roof but is there something inherently wrong in a public sector organisation paying the true cost of its borrowing, whether it is done publicly through the public works loans board or through a PFI?
  (Professor Pollock) Local government is different because it has a mechanism for income generation through local taxation but also through other sorts of income generation, through commercial activities. Local government has also always had that function. The whole purpose of the NHS was that it was—

  477. Well, its commercial activity was cut off.
  (Professor Pollock) That was the argument, that local government could raise money because it also had tax-raising powers and it could also income-generate. The NHS was not meant to income-generate, it was supposed to be treating patients, so it was not in the business of business, as it were. Nor could it raise taxation at local level, indeed if it could have done that, it would have acted completely against the spirit of a national health service. So to give trusts local borrowing and local income-generating powers is simply to take it back to pre-1948 where you had the huge inequalities in distribution of resources, and where areas with a lot of money and ability to pay will raise money easily, and those that do not, will not. So there is a major problem with saying that local trusts or local health authorities should have local borrowing powers. There is another issue which is that capital has always been starved in the NHS and this must be to do with the fact that the accountability structures have not been sufficient that voices have been able to be heard. Stripping out CHCs probably will not help that either.

  478. Can I come on to the question of the public sector comparator. It is recognised across the board I think among the witnesses we have had that there are inherent difficulties in calculating the public sector comparator over a 35 or 40 year period. The Government assesses that the value for money margin is slim, averaging out at about 1.7 per cent, and I think KPMG in their evidence have said that the public sector comparator against the PFI shows good value for PFI, albeit marginally. My question really is, if at 1.7 it is marginally in favour of PFI, what would happen if the discounted cash flow was lowered by a couple of points? It would then seem the PFI route would not appear such a beneficial option. I am wondering if that were to happen, what efficiency gains might the PFI contractors make to retain that marginal competitive edge?
  (Mr Stone) If we deal with the discount rate itself first of all, the discount rate is a measure of saying, "What is the opportunity cost of capital" to choose between different schemes. This should apply just as much to the public sector as well, so the public sector has two alternative schemes. There is a mechanism which says, "What are the long-run costs of the process", and let's contrast that with what PFI has done to include in that process as much of an estimate of risk as we can. To answer your question directly, if the discount rate is arbitrarily reduced, then the value for money balance shifts in favour of the up-front capital expenditure. However, if you went round the bankers you will discover a deep concern that reducing the discount rate is actually kidding ourselves. All the deals which have been financially closed to date, where there has been any formal analysis of the credit quality of the deal, have suggested they are somewhere about the BBB area, which in broad terms is investment grade. If we for a minute suspend disbelief and work on the assumption that the PFI schemes overall manage risk better—which is the basic premise behind them of course—then it would be fairly reasonable to argue that if you were to do an honest analysis of the equivalent scheme in the public sector, including its inherent credit quality, that would also be at least BBB if not worse, and the discount rate you would apply in any other context to compare and contrast different schemes with these credit qualities would not be 6 per cent or lower, it would be a bit higher. So there are two sides to the question. Yes, the discount rate comes down, the balance shifts more in favour of the public sector comparator, but at 6 per cent on its own it is probably not necessarily the right number. Secondly, the other thing which is important, as I said earlier, is that one of the big components of the VFM comparison is the true costs of the public sector comparator. Whilst I cannot give you actuarially certified numbers, everything we have seen in almost everything we have been involved with leads us to believe that the estimates on these are pessimistic, they are-under-cooked. So if there were to be a more vigorous and thorough and more supportive analysis of the numbers, coupled with a reasonable approach to the discount rate which takes account of the fact that what happens traditionally is that the Government hides risks through its ability to raise money either through gilts or taxes and there is no accountability for the long-run costs as there would be if they were visible—for example with Chelsea and Westminister—the expectation is that a fairer analysis would produce a more positive result in favour of the PFI. I should underline at this point, as I said earlier, the issue that we are most focused on is not a particular form of solution, it is an honest analysis. We do not care what the answer is as long as it is an honest and straightforward and contestable analysis which it is not at the moment.

Dr Naysmith

  479. This is a question for Professor Pollock, and we have probably already had the answer in the seminar we had earlier and the various questions which have been asked since, but because a Treasury official gave this evidence officially I would like to get Professor Pollock's answer to it on the record. The Treasury official said that any change in the public sector discount rate, currently at 6 per cent and it has been there for quite a long time, would be unlikely to be a crucial factor in determining the value for money of a project. Is that something you would agree with?
  (Professor Pollock) There are two elements to the value for money analysis. There is the application of the discount rate and then there is the risk transfer. One of the elements which favours the PFI is the staging of the payments, the point Julia Drown has just been making, although of course there is no reason why the public sector should not have exactly the same staging of the payments if the Government were to do the borrowing. So that is a really important point to make, the PSC adds not now need to make its payments. To come back, on the 6 per cent, we found in Carlisle, for example, by simply reducing by half a per cent it came out in favour of the public sector. But when we look at the public expenditure memorandum on the selection of hospitals, all of them show that even with the 6 per cent rate, which is too high, as has been pointed out by Social Welfare economists, it still comes out in favour of the public sector. The real element, when you look at the public expenditure questionnaire, is the assumptions about risk transfer. In order to get it VFM to stack is favour of PFI, you are having to make major assumptions about the scale and the value of risk transfer. Risk is probability but we are taking about uncertainty. Even when you put in vast amounts of so-called risk transfer to the public sector, and you are loading the public sector now against the private sector, you are finding there is very little difference in the end in the value of the schemes. The point which it is very important to make is that these risks are ex ante, they have not been proven and tested, and yet we have seen already in high profile cases like the passports office and, Seimens, NIRS 2, even Railtrack, that when things go very badly wrong, the real risks revert to the public sector, and in fact there is a real problem in the penalty clauses, because if they are too high the private sector, the SPV (Special Purpose Vehicle), can simply walk away but you are still left having to pay the banks; you still have to pay the banks and then contract for new services.


 
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