Select Committee on Health Appendices to the Minutes of Evidence


APPENDIX 4

Memorandum by T G Fellows (PS 26)

1.  INTRODUCTION

  1.1  I am making this submission as a private individual with several years of practical experience relevant to the role of the private sector in the NHS and to the Private Finance Initiative in particular.

  1.2  Working in a public corporation I was responsible for negotiating and managing contracts with companies in the private sector, mostly for the design and delivery of specified and often novel products in the fields of civil, mechanical and electrical engineering. Risks had to be handled and innovation encouraged, as in hospital building contracts.

  1.3  Following retirement, I served for seven years as a Secretary of State appointee on the Oxfordshire Community Health Council, for half that time as its Chairman. I attended and participated in Health Authority and Trust Board meetings as well as the Project Board of a major current PFI scheme.

  1.4  I was also involved, on behalf of the CHC, in organising a conference on PFI held in Oxford in September 2000. The invited keynote speaker was Andrew Smith, Chief Secretary to the Treasury and MP for Oxford East, and the meeting was chaired by Sir Christopher Paine, President of the BMA.

  1.5  The conference report, a detailed response from the Treasury defending PFI, and a brief commentary on the response are enclosed[1]. (They are also available on: www.oxford-tuc.org.uk/hospitals.)

2.  RECOMMENDATIONS

  2.1  PFI and PPP schemes should be discontinued—for the reasons given in the next section.

  2.2  The Government should bring to a usable stage the improvements they are making to the traditional procurement route. (Treasury response to the Oxford conference, para 23) Let us call this improved method "Direct Purchase" or DP. (See section 4)

  2.3  All new major capital projects in the NHS should be put out to tender on a Direct Purchase basis. If PFI is continued, it should be in open competition with DP—with the outcomes published. (It follows that the Public Sector Comparator would be scrapped.)


3.  PFI ANALYSIS—BASIS FOR RECOMMENDATIONS

3.1  Finance

  3.1.1  Is the reason for persisting with PFI the original gee-whiz idea of keeping PFI-created assets off balance sheet and out of the PSBR—an idea which was thought to have been laid to rest? But this would be a prime case of an accountancy tail wagging a common-sense dog. Or, in order to claim credit for "additional" investment in the NHS, is it thought expedient to offer the private sector the extra financial inducements of PFI? (To "be incentivised through positive means": Treasury response, para 5) But any short term electoral advantage will be bought at the expense of those local communities and Trusts which will bear the brunt in the long term should the benefits of PFI prove illusory.

  3.1.2  No fundamental distinction can be made between "private" (PFI) and "public" (DP) capital as both borrow from the private sector, although the cost of borrowing is lower for the latter. Taxpayers meet the cost of repayment with interest in both cases, as well as profit in PFI schemes with an equity element.

3.2  Value for Money

  3.2.1  Judgement in this area depends, at present, on an assessment of actual PFI bids against the Public Sector Comparator (PSC), an artificial construct intended to represent the likely cost, using traditional methods, of providing similar buildings, maintenance and services. It includes risk premiums based, in part, on historical cost over-run data. The value of the PSC, against which they must compete, is revealed to PFI bidders from the outset. (Treasury response, paras 16/17).

  3.2.2  However conscientiously the PSC is calculated, it cannot claim the accuracy of actual competitive bids under traditional (or DP) rules. For example, innovative ideas for design or construction on the part of contractors will not be taken into account.

  3.2.3  The artificiality of the value for money assessment is compounded by the generally understood non-availability of public capital for schemes judged by the Department of Health to be "PFI-able". Trusts unavoidably come under pressure to demonstrate better value for the PFI route in order to ensure the go-ahead for a needed new hospital or other major facility. It may be significant that it is the PSC risk premium which has often tilted the balance in favour of PFI. (Gaffney et al, BMJ 10.7.99).

3.3  Risk Transfer

  3.3.1  The fixed price element in PFI brings the familiar benefits of greater budgeting certainty and easier cost control. We found, during my employment, that the use of fixed price contracts, wherever possible, also meant that we did not have to build up in-house capability to the level needed to supervise the potentially cheaper cost-plus alternative. There were no illusions about otherwise benefiting from "risk transfer" to the private sector; the survival of companies is proof of their competence to cover risks of cost or time over-runs adequately in their bids.

3.4  Ownership and Services

  3.4.1  Under PFI, for 30 years or so, asset ownership and the provision of certain transferred services will be in the hands of the private sector. The problems of indirect management of staff with changed loyalties will follow. Concern may also grow, in spite of the Treasury's rebuttal, about the influence which could be exercised on Government as ever increasing proportions of the newest NHS hospitals and other facilities come to belong to private companies—foreign as well as British since GATS ensures that there can be virtually no control over the downstream transfer of ownership.

3.5  Building Quality and Maintenance

  3.5.1  It is argued that 30-year undertakings to maintain the buildings will result in high quality specification and construction so as to ensure low subsequent maintenance costs. But cash flow considerations suggest precisely the contrary course, particularly as maintenance undertakings may have to be legally enforced by the Trust concerned, against who knows what owner, using money which, it would be pointed out, should properly be applied to patient care.

3.6  Ethics

  3.6.1  The concept of partnership between public and private sectors in PFI and PPP schemes leads to problems not encountered in the more usual complementary relationship in which the differing objectives of the two are recognised.

  3.6.2  As a result, profit maximisation may take precedence over service to patients and duty to staff in, for example, choosing the location of new hospitals, in their design, capacity and construction, and in the services to be transferred. The built-in bias in value for money analyses is referred to in section 3.2.3.

4.  DIRECT PURCHASE

  4.1  "The availability of public capital is not at issue." (Treasury response, para 6) Nevertheless consideration might be given to raising locally some of the capital needed for, say, a new district general or specialist hospital so as to generate the interest, support and sense of involvement seen in Oxfordshire and elsewhere in the case of community hospitals.

  4.2  Fixed price contracting should be the normal practice in order to gain the benefits, including any risk transfer, enumerated in section 3.3.1. On occasion, especially if innovation is required, the uncertainties can be so large that they cannot be sufficiently evaluated within the limits of expenditure companies will commit in the course of preparing their bids. Bidders will be concerned about under-estimating the risks and purchasers about excessive risk premiums. A solution is to award preliminary, brief, fixed price, fixed term contracts to a selected short list of companies to enable them to arrive at firm designs, prices and completion dates for the subsequent construction stage.

  4.3  Ownership would be with the NHS from the start. This should make it both more feasible and more economical for changes to be made to the structure, the services and the use of the facility to suit the inevitable developments in medicine over time.

  4.4  Conventional guarantees for buildings and equipment could be demanded and subsequent maintenance contracts placed with whichever organisation is most suitable at the time. Build quality standards would be specified and verified by the Trust.

5.  CONCLUSION

  5.1.  In short, it seems to me that, in the case of PFI:

    —  Finance is expensive.

    —  Value for money analyses are untrustworthy.

    —  Risk transfer is common to all fixed price schemes.

    —  Ownership outcomes are not predictable or rectifiable.

    —  Building quality claims are implausible.

    —  Ethical problems are inherent.



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