Select Committee on Health Minutes of Evidence

Examination of Witnesses (Questions 520 - 539)



  520. There is nobody from that department involved in your team?
  (Mr Deegan) No.
  (Mr Gritten) If I may pick up the point about the flexibility offered by the public sector. Two years after the original business case was signed up it was recognised there were not going to be sufficient beds as a result of undertaking a whole system review in which we involved primary care trusts, social services, the health authority we got agreement to increase the number of beds. The issue here is that although we were in the middle of a scheme we were able to redesign the scheme and to respond very quickly to increase the number of beds that were being delivered. Furthermore, we have been able to build into that to provide development zones, so that if necessary we can increase the beds still further. I accept that that is common practice but the issue is in the middle of PFI would you be able to respond that quickly and at what price, that is the point I make.
  (Mr Davis) I think it is an extremely valuable point you have made, there is no difference between PFI procurement. Quite frankly the Health Service did not know what they wanted during the extensive negotiations and we redesigned the hospital to accommodate different needs both during the negotiations and then we changed it afterwards. There have been significant capital changes which have improved the mix of refurbishment to new build within the Unitary payment at no extra cost to the trust. I do not think you could have done that with traditional funding.


  521. Are you referring to the Halifax Scheme?
  (Mr Davis) I am referring to the Halifax scheme.

  522. You will be surprised to know that the MP for Halifax, Alice Mahon, said to me how desperately short of beds they are.
  (Mr Davis) I think that is possibly still the case but there are more beds than were originally planned by the Health Authority, it was planned originally for 400 new beds and 100 short life beds, we now have over 600 beds embedded in the scheme and a winter ward on top, so the bed count has gone up. The point I would like to make is we were able to switch revenue with capital in the PFI to get rid of that awful 1970s maternity block, which was dysfunctional and in poor condition but was to be refurbished in the PFI scheme. We have actually demolished it and have put it into new build into the new block and it is a far better environment. It has been at nil net cost to the NHS by doing that because we have swapped long term revenue liability for maintenance into our capital.

Sandra Gidley

  523. This is a question to Jane Herbert I wanted to ask, in the evidence of the financial issue this is something quite key, because a lot of the things we have spoken about during the Inquiry it is not clear to me that anything is of particular benefit to PFI or public sector. A lot of it, it seems to me, comes down to the basic question, is this some sort of accounting trick. Your section 2.5 on financial issues glosses over quite a lot of how things were done, I would like a bit more meat on the bones. In the end you say, "our business case demonstrated value-for-money in a PFI scheme over an entirely Treasury funded option. Ultimately this was justified through the benefits of an early delivery of the PFI solution". That seems to me to be saying there was not actually much in it financially, which comes back to this financial question. To pick up again on what we were talking about earlier, this six per cent return on assets, does that go to servicing the PFI in effect?
  (Ms Herbert) It does not compare directly on the balance sheet largely because it is below the line in our accounting terms.

  524. "Below the line", I do not understand the phrase.
  (Ms Herbert) Profit and loss. We also have a large amount of real estate which is still publicly funded, so I cannot answer your questions because we have not done a direct comparator of those two sets of figures. I would need notice of the question.

  525. I think that it would be useful for this Committee if we could have a direct comparison. This is what a lot of us are getting quite hung up about.
  (Ms Herbert) Could I answer the underlying issue, I would certainly agree with you that the case for value for money is very marginal. I would not like to say at this stage, less than six months into our occupation of a new hospital, whether, in fact, over a 35 year period that value for money will prove to be one way or the other or in balance. All I can tell is you that the case that was made was very much in balance, it was quite marginal but it came out in favour of PFI.

  Chairman: You have been very careful on that point. You are not clear how it will turnout. We could have you back in 35 years were you not careful.

Sandra Gidley

  526. Would it be fair to say that had public sector capital been available it would have been quite easy to tweak the arguments and go for that scheme?
  (Ms Herbert) It was a marginal case. We would have needed to change underpinning assumptions. I would not suggest for a moment we deliberately fixed the value for money case, we did not. That, it seems to me, to be the corollary of your question?

  527. Was there an option for public sector finance at the time?
  (Ms Herbert) Not immediately, no, not for some years.

  528. If you wanted a new hospital you—
  (Ms Herbert) It was PFI or nothing.

  529. It is in your interest to make a strong case?
  (Ms Herbert) That is clearly so.

Andy Burnham

  530. I just wanted to turn to the issue about the NHS and the position as a contractor for the private sector. Mr Stone in his evidence I think said that the quality was maintained through the penalty mechanism and through the contracting system. Mr Stone, earlier, I think you said something along the lines, if services are not delivered you do not pay. In the trusts' evidence we get a very different picture, the trusts keep talking about a long term partnership with the private sector, so they would not want to be making problems by asking for their penalty payments, creating a confrontation—that is the adversarial relationship between the two—you seem to be saying that you are expecting the public sector to do that because that is how you in the commercial world would operate and they seem not to want to operate that way. Is that a fair summary?
  (Mr Stone) It is an interesting summary. I think the comparison is important. Whether or not the trusts choose to make deductions and whether or not they choose to pay for what they get, which is fundamental to what this is all about, it is one of day-to-day management, what has certainly happened as the process has developed over the last five or six years is that the NHS and the more recent trusts have become much more aware of the extent to which a catalysts are content to be paid for what they do. The payment mechanisms by which the trust makes deductions are not penalties, they are deductions for either poor or missing service, that is an important distinction. This is not a large baseball bat, this is payment for what you actually get. The more recent schemes, the way that the payment works, has become much, much cleverer, a much more direct link between the quality of service delivered and payments made. This is an evolving involving art, it does not have to be something which is adversarial at all.

  531. Does that suit you if they are not adversarial? The public sector traditionally has not had to scrap it, that is not their job, are they letting you off too much, do you think?
  (Mr Stone) I think they do need to be aware that they can properly deduct for failure to deliver and recognise that. Provided that is done in the open way which it is intended to be done it does not create a problem at all, it balances the relationship with the partnership. What is also interesting is to look at the response of the funders in these schemes to the payment mechanisms, you have a completely mixed approach. In the earlier days the funders fight like mad to avoid any reductions at all, once they are in place the effect of deductions happening causes the funders to put pressure on the management of the delivery mechanism.

  532. I can see how that makes sense in principle, but in practice I can see the trust fund feeling that they have to give those services to people come what may if there is an unacceptable souring of the relationship. They cannot afford to get into that position, so these are in some senses paper penalties and they need to make sure people are going to turn up and make sure they do what they are meant to do.
  (Mr Stone) If the service is not there, if the spillage is not cleaned up, if the gas is not going to the theatre there should be deductions. The more modern payment mechanisms make this much more straightforward and much less emotional than there might have been in some of the early schemes. There has been a lot of learning in this process. It is simply about producing a fair and honest behaviour between both parties, just the same way as if you employ a contractor to paint a window and he does not paint the window you do not pay him for that window. There is a rateability proportionality intended. In terms of the effect on interpersonal relations it does not necessarily have to cause a problem. If you go and visit some of the early schemes in place, some of them in London, here, Greenwich and Dartford, it has not produced any sour relationship at all, far from it. Again the anecdotal evidence from the Price Waterhouse Report, there is evidence that there is support for this sort of behaviour. It is incumbent on all of us to make sure we do pay for what we get and no more.
  (Mr Davis) I would like to make two points, if I can, we actually have far more scrutiny and regulation than the public sector has. Secondly, any sanction is enforceable, which it is not enforceable on the in-house team. We have scrutiny by media. We have scrutiny by this House, by this Committee. I have had a personal experience of being scrutinised by the Community Health Council in Halifax on 19th September, it was a great lesson in humility. I think they are doing a great job and I hope the Secretary of State allows them to carry on doing it.


  533. Controversial stuff!
  (Mr Davis) The point I want to make here is the impact of private capital being invested puts another discipline on us which is lacking in the public services at the moment. I think it adds to the quality of service and regulation over the long term. Under the contract the sanctions can be enforced and I think Professor Pollock touched on that as though it was a negative point, the banks had to be paid out if we failed. I will point out, first of all, that we are putting in risk capital, 10 per cent of our money is going into schemes which is entirely at risk. We take a huge risk on our payment stream. We will lose the entire monthly payment for non-availability and a succession of performance failures. There is a real risk in these schemes. The positive aspect is that the private sector is being driven by the impact of capital having to be paid for. We can now deliver a new acute DGH, a large one, in three years from signing contracts. It has never been done before. Not only can it be delivered in three years but it can be delivered on time and to a fixed cost that was quoted three years before. I have to say also I think better quality is being procured.

Andy Burnham

  534. One of the difficulties we are getting towards is in the old days if you built a new hospital with public money people could have paid for service improvement by failing to maintain the infrastructure, that is what happened if you want to eke out money, but here the trusts do not have that flexibility.
  (Mr Stone) Which I think is a good thing.

  535. It might be a good thing because you know that everything is going to be better, better facilities and they may get savings, that is essentially one of the key differences.
  (Mr Stone) The key difference is that these premises will be fit for purpose and safe to use for 30 years under the contract.

  536. Or your money back.
  (Mr Stone) This is a huge benefit of PFI. It is not about inflexibility, it is about guaranteeing the sustainability. I think this is a good thing.

  537. Do you think we need get more hard nosed? Do you think they are inviting that kind of commercial relationship and the NHS need to do that more?
  (Ms Herbert) It is a new relationship, because traditionally we either have a service in-house or we let a contract for maybe a year and we can change that contract and the terms of that contract fairly regularly. We have signed up for 35 years and the one thing we can be sure about is we will not have thought of everything in the contract that we signed. I believe we have to develop a more responsive relationship that allows us to change the service as the service to patients changes. I do not believe it is appropriate to have an entirely hard nosed relationship in the same way you would if you had a one year contract, it has to evolve over time and be more flexible.
  (Mr Stone) I quite agree.
  (Mr Deegan) I think it clearly is about partnership. We need to have very clear and measurable standards. We need to work on joint monitoring arrangements and link that directly to the payment mechanism. These are long term relationships we need to work through, that is critically important.

John Austin

  538. One of the points which was raised in a previous evidence session was the question of monitoring and ensuring the service is being provided. Because of the cosy relationship that developed there was a reluctance to impose the penalties when the service was not being delivered?
  (Mr Deegan) From personal experience if, for example, cleaning or catering is not being provided appropriately to areas like wards, ward sisters are, quite rightly, becoming increasingly vocal to set out when things are not working, so I do not think it will just be managers in monitoring teams, it will be frontline clinical staff saying this is not being provided to the standard you assured us it will be.

Dr Taylor

  539. Back to extra beds, using the Worcester PFI as an example because they have discovered, the authorities, that 474 beds was not enough and they need at least 100 more, how is that actually funded?
  (Mr Davis) The core PFI scheme was 454. There are very high quality retained estate beds in the south block.

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