Members present:
                    Mr David Hinchliffe, in the Chair
                    John Austin
                    Andy Burnham
                    Mr Simon Burns
                    Jim Dowd
                    Julia Drown
                    Sandra Gidley
                    Siobhain McDonagh
                    Dr Doug Naysmith
                    Dr Richard Taylor
        Memorandum submitted by The Department of Health
                    Examination of Witnesses
       THE RT HON ALAN MILBURN, a Member of the House, Secretary of State for Health, 
     MR ANDY McKEON, Head, Medicines, Pharmacy and Industry Group, MR PETER
     COATES, Head, Private Finance and Capital, Department of Health; MR NICHOLAS
     MACPHERSON, Managing Director, Public Services Directorate, Treasury, examined..
  Chairman: Colleagues, can I welcome you to this first session of our inquiry into the role of
the private sector in the NHS and I once again thank you, Secretary of State, and your team for
coming along.  Can I also put on record our thanks to your Department for their very helpful
written evidence?  As this is a new inquiry, I suggest that there should be one or two declarations
of interest that we need to make before we start.  I will begin by saying I am a member of
UNISON.  My constituency in the Labour Party has a constituency agreement with UNISON 
and UNISON did make a donation to my constituency party at the last general election.
  Mr Burns: My constituency has a constituency agreement with the GMB and we were given
a donation to run our general election campaign.
  Julia Drown: I am a UNISON and a TGWU member and UNISON has a development plan
with my constituency.  I cannot remember whether they made a specific donation to the election.
  John Austin: I am a member of MSF.
  Andy Burnham: I too am a member of UNISON and the TGWU.
  Jim Dowd: I am a member of MSF and GMB.

  1.  Can I begin by asking our witnesses to introduce themselves to the Committee? 
  (Mr Milburn) Alan Milburn, Secretary of State for Health.
  (Mr Coates) Peter Coates, Department of Health Finance Unit.
  (Mr Macpherson) I am Nicholas Macpherson from the Public Services Directorate in the
  (Mr McKeon) Andy McKeon, head of Medicines, Pharmacy and Industry Group.
  2.  Mr Macpherson, what does your role entail?
  (Mr Macpherson) I run the Public Services Directorate in the Treasury, whose main aim in
life is to improve the value for money of the public services year by year.
                             Mr Burns
  3.  Secretary of State, what forecasts have you made of future activity levels under the
  (Mr Milburn) Let me begin with where we are now.
  4.  No; that is my next question.
  (Mr Milburn) It depends on what we decide to do in policy terms but there are five areas that
we are considering developing.  As you are aware, prior to the Concordat and prior to the Private
Finance Initiative, the relationships between the NHS and the private sector, although they are
quite longstanding, were pretty ad hoc in most cases.  We do not think that has been particularly
to the benefit of NHS patients.  In the course of the last few years, we have the Private Finance
Initiative going in hospitals now which is of benefit to patients and the Concordat is good also
because it is providing extra care for NHS patients.
  5.  That is a different view to your predecessor, is it not?
  (Mr Milburn) May I come to the five points?  You rightly asked where we were going in the
  6.  I asked what your forecasts were of activity levels.
  (Mr Milburn) I will come to that.  Our big problem today is that we are short of capacity in
the health care system.  There is extra money going in from the public purse to address these
shortages, whether of staff or buildings, but we need extra help too.  We made a start with the
Concordat and the PFI but perhaps I can come to the five areas where we plan to take this further. 
First, tomorrow, I will be announcing that we expect to make up to 40 million available to the
NHS to buy treatment for NHS patients in private sector hospitals over the course of the coming
months.  That is double the 20 million we put in this time last year.
  7.  On a technicality, am I right in thinking you have just broken your own embargo on that
  (Mr Milburn) I felt it might be of benefit to the Committee if I told you.  You would be pretty
unhappy with me if you read it in tomorrow morning's newspapers.  Usually, people complain
about things being announced on the Today programme.
  8.  Absolutely but given that you have known for some time that you were coming here this
afternoon why, according to your words just now, have you got a press release out which I
suspect is probably embargoed for a minute past midnight?  Why did you not just announce it
now rather than embargo it?
  (Mr Milburn) Because there are other aspects to the press release.  I do not know if you have
a copy of it but you should not have because it is restricted to the press.  I will send you a copy
tomorrow and you can read all the other interesting things that are in it.  Secondly, we have
started work on what we are calling a national framework agreement to build longer term
relationships between the National Health Service and the private sector with a view to doubling
the number of NHS patients treated in private hospitals to 100,000 a year from next year. 
Thirdly, we are exploring the possibility of contracts under which part of or indeed even entire
private hospitals would become NHS providers of services for a number of years.  Fourthly, we
will consider approaches from private sector providers to build privately owned diagnostic
treatment centres which will perform operations purely on NHS patients.  Fifthly, we are
exploring whether private sector providers in mainland Europe who have spare capacity available
could treat NHS patients there, although my very strong preference is for those private  providers 
to establish their services here with their own staff, to provide treatment for NHS patients at
home rather than those patients having to travel abroad.  On all these five points we are in active
discussion at the moment.  There is no blank cheque and we have to be assured that we not only
get good value for money for the taxpayer but we are also assured of the highest standards of care
clinically for patients.  However, I think these plans do amount to a pretty big expansion in the
relationship between the NHS and the private sector that I believe will bring benefit to NHS
patients.  There is one important caveat to all of this.  In the second half of this financial year,
right now, the private sector will undertake around 1.5 per cent of the total number of operations
that are undertaken on NHS patients.  The NHS is the dominant provider of care for patients  in
the United Kingdom.  Nonetheless, what we know is that the private sector can make a
significant contribution in particular to guaranteeing shorter waiting times for NHS treatment for
NHS patients.
  9.  Factually, what is the level of activity that has taken place under the Concordat to date?
  (Mr Milburn) There are two separate but related things.  First of all, the number of operations 
that have been bought with the so-called Concordat money.  We put in 20 million last year at
around this time, in November when we launched the Concordat.  It bought around 10,000
operations in total.  The build up was slow through November and December and peaked in
March.  I want to come to the reasons for that.  In total, we estimate that currently somewhere
between 50,000   maybe up to 60,000   operations a year are undertaken at the expense of the
National Health Service on NHS patients, so treatment for free but in private sector facilities. 
As a matter of perspective on all of this, the private sector in this country currently has around
10,000 beds in its hospitals.  The National Health Service has around 136,000 beds.

                           Julia Drown
  10.  How was that 20 million distributed across the country?  Was it according to where
people had relationships with private sector partners or according to need?
  (Mr Milburn) I cannot quite remember the methodology but it was not according to the
relationship.  The relationships are pretty uneven.  Incidentally, we have just had completed a
survey of National Health Service providers and NHS hospitals to see how they are using the
relationship with the private sector to benefit NHS patients. 
  11.  Could you give us a note?
  (Mr Milburn) We are analysing at the moment and we will gladly pass that on to you.  It is
uneven according to specialty and it is also uneven geographically.  I suspect that is for a number
of reasons.  
  12.  The relationship is uneven or the allocation is uneven?
  (Mr Milburn) The relationship is uneven and the spend therefore is uneven.  My sense is that
in some parts of the service there is broadly some ideological concern about contracting with the
private sector.  Elsewhere, there are suspicions probably on all sides.  Thirdly, there are uneven
relationships that have been developed over a period of years.  If we are going to make this thing
work and if we are going to expand the capacity that is genuinely available to the NHS patient
we have to put that relationship on a more mature footing.

  13.  In your evidence the Department refers to four essential tests which need to be applied
to any proposed partnerships with the private sector.  What steps have you taken to evaluate
whether the existing Concordats at local level meet all those tests?
  (Mr Milburn) The local relationships thus far under the Concordat arrangements have not
been subject to the extent of monitoring that we will want to see in the future.  For example, there
are some issues about the price differentials that are being paid by the NHS to different private
sector providers or even probably to the same private sector provider.  Basically, there are three
firms who dominate around 60 per cent of the market as far as the private sector is concerned in
this country.  BUPA is one; BMI and I guess GHG is the biggest general health care group.  We
are getting anecdotal evidence back and that is one of the things that we need to substantiate as
a consequence of our analysis of this survey.  Different prices are being charged in different
places.  We have to make sure that we get decent value for money for the taxpayer.  What we will
move to over time is a situation where, as you know, we are able now to publish this information
on an annual basis, to assess what the costs of carrying out different procedures are in different
NHS hospitals.  We publish these NHS reference costs on an annual basis.  If you look at the
price of a hip operation or the price of a heart operation, it might be cheaper in Wakefield than
it is in Darlington, for example.  Maybe there are some good reasons for that but my guess is that
there are some bad ones too.  It is quite important in our arsenal to make sure that we get decent
value for money from within the National Health Service.  In future, if we are going to have a
longer term relationship with the private sector, where the NHS is not just contracting on a spot
purchase basis   i.e., there is a problem with the waiting lists and we decide that we are going
to pay a premium rate to deal with that for a month.  We do not always get the best value for
money.  One of the reasons that we are taking the steps that I set out earlier in answer to Mr
Burns is to make sure that not only do we have a longer term relationship but we get fair value
for money.  My own view is that if we enter in particular into longer term contracts what we will
be able to do is get better value for money for the NHS and for the taxpayer.  One of the ways
that we will seek to do that is probably by using NHS reference costs as a benchmark for the sort
of prices that we would expect local NHS hospitals to pay when they contract with the private
sector hospitals.  
  14.  Can I ask a couple of practical questions about the tests and what appears to be
happening, certainly in my part of the country?  You will recall that when we undertook our
inquiry into NHS consultants' contracts we received some evidence suggesting that there was
a correlation in certain areas between the lengthy waiting lists of certain consultants and their
involvement in private practice.  There were suggestions that there were interesting connections
here.  How do you defend a situation where the patients who are waiting to see a particular
consultant in the NHS are subsequently referred through the Concordat to a private hospital and
then see the same consultant in that private hospital that they were hoping to see on the NHS
waiting list?  I can give you an example.  I spoke last week to a gentleman in my area whose
mother had had this experience in Leeds.  She had been waiting for some considerable time.  She
was an elderly lady.  She was told she was going to be referred to Roundhay Hall Private
Hospital, and she was amazed to find that she was seen by the consultant that she had been
waiting a long time to see on the NHS.  It does not seem to add up to me that this arrangement
has been made in an effort to improve things.  I would have thought it would make more sense
for that consultant to see the lady in the NHS and to spend more time on his NHS work.
  (Mr Milburn) If that could happen, that would be a sensible thing to do but virtually every
hospital in the country is running pretty hot right now.  Across the National Health Service, the
acute hospitals are running at an occupancy rate of between 89 and 90 per cent on average for
beds.  I wish there was a lot of spare capacity in the NHS, because it would make all of this so
much easier.
  15.  This is because of consultant time, not bed occupancy.  She was seeing the same doctor.
  (Mr Milburn) I understand that but it is entirely possible that, having seen the consultant, the
problem was not the consultant time.  The problem was the lack of a bed, the lack of an operating
theatre and the length of time that your constituent was going to have to spend on the waiting list. 
What we are trying to do here is a very simple thing.  I think we all accept   I think this is a
matter of agreement in Parliament   that the biggest problem we have across the health care
system, not just in England but I guess in the rest of the United Kingdom as a whole, is the
capacity shortage.  We have to find a way of expanding capacity.  If there is spare marginal
capacity available in an NHS hospital and we can treat NHS patients there, that is what we
should do.
  16.  You are slightly dodging the question.
  (Mr Milburn) No, I am not.
  17.  It is not about capacity; it is about accessing advice from a consultant.  In your essential
tests, you talk about one of them being that any proposed partnerships with the private sector are
consistent with the local and national strategies of the NHS and its development.  I do not
understand how that kind of situation is consistent with your, in my view, very welcome efforts
to try and obtain consultants to work full time in the National Health Service when they first
qualify, for the first seven years.  That, to me, is exactly the way we should be going, but this
lady's experience of the Concordat seems to me entirely contradictory to that strategy.
  (Mr Milburn) I do not think it is, with respect, because what we are trying to do in both cases
with the Concordat and incidentally with the extra investment going into the National Health
Service and with our proposals around the consultant contract that we are in negotiations with
the BMA about right now is exactly the same thing.  That is about expanding the capacity that
is available to NHS patients.  I can see how people could get to that conclusion but I think it is
the wrong conclusion because at the moment a consultant qualifies and a lot of consultants
incidentally have whole time contracts working purely for the National Health Service   in fact
the majority do   and most consultants are doing a really good job in the NHS and over-fulfilling
their contractual obligations to the NHS.  Where there is a choice that consultants make between
spending their time operating privately on privately paid for patients, not NHS patients, the
consequence of that is that it is denying care to NHS patients.  My primary interest is if people
want to pay for their own care that is fine.  If people want to take out private health insurance,
that is fine too but what I believe in is a system that is there for free and available to all.  What
I want to do is expand its capacity.  The reason that we are making the proposal around
restricting access to private sector work   i.e., to privately paid for patients for up to the first
seven years of a newly qualified consultant's career   is precisely to expand the availability of
their time, their effort, their skills for the benefit of NHS patients.  What the Concordat does with
the private sector is expand the capacity that is available to NHS patients.  It just so happens that
that part of the capacity might exist in a BUPA hospital or a GHG hospital rather than an NHS
hospital.  In the end, what counts from the patients' point of view is the quality of care that they
receive and how timely is the manner in which they receive it.  My guess is, although I would
be interested in seeing the details of the case you refer to, that the consequence of going through
the Concordat  is that the person you referred to is getting faster treatment than if they had to wait
on a long NHS waiting list.
  18.  Would you accept that that person was not unreasonably concerned, having waited for
a long period of time on the NHS, to be told she was going to a private hospital under the
Concordat and then she had seen the same consultant who was earning in his private time within
that private hospital?  It seems to me not to quite add up.  I can understand her concerns.  Would
you accept as well that these hard working consultants who commit themselves full time to the
NHS resent very much the way in which they believe the government is now rewarding those
consultants who spend a lot of time in the private sector by pushing NHS patients through the
Concordat into their private work?
  (Mr Milburn) No, I do not accept that either.  I would be interested to see the details of the
case that you refer to but my guess is that the person may have been concerned about seeing the
consultant wearing two hats, operating in an NHS hospital and still operating on that NHS
patient, providing treatment for free according to clinical need in a private sector hospital, but
I bet they were pleased with the quality of care that she got and the fact that they had to wait less
time than they would otherwise have had to.  That is where we have to get to, with respect.  We
have to get to a position, in my view, where what counts is the patient's interests.  
  19.  I am obviously concerned with patients' interests.  Can I raise an issue that I wrote to you
about in respect of the essential tests that your evidence refers to?  The fourth essential test is that
any proposed partnership with the private sector is consistent with public sector values, including
the treatment as determined by clinical need.> You will recall I asked a question in July and
subsequently wrote to you about my concerns over how we ensure clinical priorities where we
have the situation that I illustrated to you.  We have in Yorkshire an arrangement whereby a
number of health authorities are, through the Concordat, purchasing operations at Formby
Hospital in Sheffield, which is a BMI health care group.  My concern on this was how do we
ensure, where you have a series of streams of different patients, that the clinical priority for those
patients is accorded on the basis of their needs?  The consultants are based in the NHS in
Sheffield, working in the Formby Hospital.  They are performing operations on their own private
patients and on their NHS patients in Sheffield and on at least two sets of NHS patients from
Leeds and Calderdale or Kirklees under the Concordat.  You wrote to me indicating that a
reasonable degree of consonance had been secured between waiting times and clinical priority
had not been compromised, but I have looked at the protocols and there is no mention of any
clinical priority as far as I can see.  How do we cross-prioritise, with a large group like this, to
ensure that within the Concordat the patients who most need help are treated first?  As far as I
can see, with this arrangement in Yorkshire, that is not happening.
  (Mr Milburn) I think that is a very reasonable point, if I may say so.  That is why we have
to get to a different longer term position to the one we have now.  The Concordat is now being
used by NHS hospitals to bail out their immediate problems.  It means people get treated more
quickly and that is a good thing.  I do not have a problem with that at all.  The more people we
can treat more quickly, the better the National Health Service will be for patients.  However,
what is self-evident from the figures under the Concordat is that there is a headlong rush now,
under the current arrangements, to spot purchase to ensure that the National Health Service
locally gets to the position it needs to get to by the end of the financial year, so you suddenly
have a big whoosh of cases going into the private sector in March and then it dips back down
again in April.  This is a problem across the National Health Service as well because the National
Health Service follows precisely that seasonal pattern, where it starts very slowly in April; it
tends to build up by the autumn; it dips again in the winter and you have a mad rush through
February and March to get through the maximum number of cases.  What we have to do in NHS
hospitals is to even that pattern out and that we would get an optimum use of resources amongst
doctors, nurses, staff and facilities.  Where I want to get to with the Concordat is this: rather than
just doing spot purchasing   i.e., the NHS being bailed out by a local private sector hospital  
I want the primary care trust who commission the care and the independent private sector
providers sitting down together, working out a longer term relationship that plans the treatment,
plans the care, not just over a period of months but potentially over a period of a number of years,
providing of course that the NHS gets a good deal on cost and gets the appropriate clinical
standards.  That way, it seems to me, you begin to address precisely some of the clinical priority
issues that you have alluded to.  If you have a longer term relationship, you can plan the case mix
that will be looked after in the private sector.  It is worth bearing in mind that the private sector
tends to have skills in particular specialisms.  It is very good at doing cataracts, hips and knees. 
It does less cancer.  It does some heart operations but nowhere near as many as the National
Health Service.  We have to get to a position where we are taking optimum advantage on a longer
term basis with the private sector of the skills and expertise that it has.  We can only do that if
we are prepared to get out of short term purchasing and into longer term agreements.

                          Sandra Gidley
  20.  We have just had the announcement of this year's jam jar of money to solve the problem,
bit though it may be.  You have admitted that you would like to see a long term solution to this
but it is not quite as easy as everybody is making out because the problem that is being
highlighted locally with the independent, private hospitals is that they want to deal with their
private patients first, the ones who fund them.  They do not feel inclined to commit, because they
do not have the capacity, to taking more NHS patients.  They are quite happy to take the patients
short term when they have the capacity but there is a gradual creeping and a pressure being put
on these hospitals so that more and more cases are taken.  This is having an effect on people who
pay for their private health care.  Bizarrely, people in the private sector are now waiting three
months for certain hospitals and certain consultants.  I have had people ringing up and saying,
"I am paying twice and I am still not being seen quickly."  Do you feel that it is fair that patients
should pay twice and still have to wait because the private hospitals are full of NHS patients? 
  (Mr Milburn) I do not believe that private sector hospitals are full of privately paid for
patients.  In fact, I know that is not the case.  We are running at 89 per cent occupancy now in
the NHS.  BUPA and other private sector providers are running probably at 55 or 60 per cent
occupancy, based on private sector customers paying.  They have 30 per cent occupancy free. 
There is a very simple choice.  We can say we do not like the private sector and we are not going
to do business with the private sector.  There are all sorts of difficulties in getting into bed with
the private sector.  Or, we can do the sensible and mature thing which is to take advantage of that
spare private sector capacity for the benefit of NHS patients.  That is what we are going to do. 
Indeed, we have been in discussions through Andy and other officials over the course of the last
few months with the major private sector players who indicate three things to us.  One, that
business is increasing as a result of the Concordat with the National Health Service.  Indeed,
BUPA tell us that the number of NHS patients has increased three-fold in their hospitals. 
Secondly, they still have spare capacity available.  Thirdly, they tell us that they can
accommodate a doubling in the number of NHS patients coming through their doors.  At a time
when my biggest problem is not the shortage of cash   although more cash would always be
helpful ----

                           Julia Drown
  21.  Especially in Swindon.
  (Mr Milburn) The biggest problem is the shortage of capacity.  I would be foolish to say to
BUPA, GHG or BMI, "We do not want your capacity because somehow it is contaminated
goods."  What I am interested in is getting the best benefit for the NHS patients.  That is what
I am going to do.  If that causes a problem for our private sector partners, that is a problem they
have to conjure with because the result of us doing more business with them is that they get more

                          Sandra Gidley
  22.  We are talking Hampshire here so perhaps you should get out a bit more.  One of the
other problems is, with the constant reorganisations in the Health Service, how do we know that
there is going to be enough long term stability so that we can forward plan, because there is
another initiative nearly every week coming out of the Health Department.  There were 25 during
the consultation document's release during the recess.  Are we going to have a period of
  (Mr Milburn) I am sorry that we are doing too much.
  23.  It might be better to concentrate on doing fewer things well.
  (Mr Milburn) We will try not to do so much in the future.  If that is what you would like us
to do in Hampshire I am quite happy to oblige and I am sure the people of Swindon will be
absolutely delighted.  We have a long term plan.  It is called the NHS plan.  It is a plan for ten
years and that is what we are going to implement.  There are various aspects to the NHS plan. 
I do not know whether you have had a chance to read it.  If you have not, I will gladly send you
a copy of that and you can see the range of things that we are trying to do.  What we are trying
to do is change the NHS in all respects.  What frustrates me about the debate on NHS reform is
that although what we are talking about today is really important because it does provide more
capacity in the system and means more care for NHS patients, sometimes reform in the NHS is
characterised purely as the NHS developing a new relationship with the private sector.  It is one
part of the reform programme but it is by no means the whole of the reform programme.  What
we have to do is breakdown the demarcations between the staff, as we were discussing at last
week's hearing, ensuring that the relationship within the public sector between health and social
services improves; making sure we make the optimum use of the skills within the National
Health Service, the extra IT that we need to get into the National Health Service.  These are at
least as important as the work that we are now doing with the private sector.  My own view about
this is that we would be incredibly foolish to turn our backs on spare capacity where it exists and
where it can bring benefit to NHS patients.  
  24.  I admit there is capacity but it is not always long term and it is not all around the country
so different solutions need to be prepared for different parts of the country.  You have just
mentioned breaking down demarcations between staff.  If more NHS staff are attracted to the
private sector because of the increase in the Concordat, would you say that was a triumph or a
disaster for government policy?
  (Mr Milburn) The crucial thing is what happens to the NHS patient and whether they get care
provided for free, according to need, not ability to pay.  What is happening in the NHS today is
that there is an increasing range of providers in play.  The dominant provision is still through
mainstream NHS hospitals but what we are also seeing, as we develop the Concordat, is growth
in NHS treatment taking place in the private sector hospitals.  As far as the staff issues are
concerned, if we were to see the seepage out of NHS staff, particularly some of the skilled staff
where we have really big shortages, into organisations that were not providing care for NHS
patients, that would be a concern.  What we are talking about here, remember, under the
Concordat is precisely making more care, more treatment, more operations available to NHS

                           John Austin
  25.  You refer to the question of capacity and the Chair referred to consultants and consultant
time.  You talked about beds not being available.  We all know that in the past beds have been
cut dramatically, particularly acute beds.  It is not the physical capacity that has disappeared; it
is the staffing for those beds that has disappeared.  When we talk about a shortage of capacity,
it is because there are not enough nurses or whatever in the NHS hospitals.  There is not some
magical, additional pool of people.  There is one pool of nurses.  Some work in the private sector
and some work in the NHS.  Are we not just continuing to compound the problems of the NHS
hospital and its ability to retain nursing staff?
  (Mr Milburn) No, I do not think we are and I would be concerned if that was happening,
since we have had such an enormous effort in getting nurses back into the National Health
Service, an effort incidentally which has paid dividends.  We have a lot more nurses coming
through all the time.  It would be a concern to me, as I think I said last week, if we were getting
nurses in through the front door and then found, through whatever means, they were leaving by
the back door.  There are two points to this.  First, I do not think it is true that the only problem
in terms of capacity that we have is just staff capacity.  I was not saying that the only problem
was theatres, beds or IT facilities.  In Kent right now we have capacity constraints and NHS
doctors and nurses who walk down the road to a private sector hospital and operate on NHS
patients in their NHS time.  Why do they do that?  They do that because their hospital is full. 
Maybe over time we can put that right but do not let us pretend that somehow or other the
capacity constraints that the NHS faces today, the shortages that we face   and we all know the
reasons for that: lack of investment over 20 or more years   are just capacity constraints and
shortages.  They are about staff.  They are about infrastructure too.  You only have to walk into
most local hospitals    Greenwich Hospital would be a good example   to see precisely what the
result of under investment has been.  Frankly, shoddy buildings, dilapidated equipment,
equipment that breaks down all the time and a shortage of capacity.  The first point is it is not
purely about staff constraints; it is also about real hardware constraints   i.e., around operating
theatres and beds.
  26.  Greenwich Hospital has closed and the new Queen Elizabeth PFI Hospital is open: state
of the art, absolutely superb facilities there.
  (Mr Milburn) That last one was terrible though, was it not?
  27.  You have a private sector hospital with spare physical capacity.  A private sector hospital
is running for profit.  It is not going to staff that extra capacity if it has not filled it with private
patients.  Therefore, if you then give it an incentive to take NHS patients, it will recruit the staff
in to cope with that number of patients.  The only pool it can poach them from is from the NHS.
  (Mr Milburn) I do not think necessarily think that is right.  I am not sure on what terms
BUPA employ people but it is certainly true you could make quite a convincing case that BUPA
does not employ a huge number of doctors.  It has some medical officers in its hospitals but by
and large it relies upon NHS consultants and so on.  The same is not true of nursing staff.  The
private sector is quite a big employer of nursing staff.  I cannot remember what the numbers are
now but they do have their own staff on their books, so to speak.  The question is whether or not
from the private sector point of view and, more importantly, from my point of view we are
making optimum use of the resource that is available.  It is like the hardware.  If the hardware
is lying idle in a private sector hospital   i.e., the bed, the operating theatre, the critical care
facility   equally if there is software   i.e., the nurse   lying idle, not being used to maximum
efficiency, that is a resource that is being wasted.  What we are trying to do is to maximise the
capacity all round.

  28.  You said a moment ago that the problem was not so much resourcing, although
obviously more resources would be welcome, but capacity.  You will recall when the Prime
Minister announced the NHS national plan I had a slight difference of agreement with him on
emphasis rather than anything, in principle, over the use of the private sector.  I suggested, if we
need that capacity, although the private sector in many respects is having difficulties in some
areas, why do we not simply buy that capacity and take over those hospitals.  He said that was
not possible but I recall over the recess period we did do that.  Why do we not do it more often?
  (Mr Milburn) The London Heart Hospital, which is the hospital you refer to, I bought for 25
million and we got a really good deal because it was an asset that was worth 35 million   state
of the art, fantastic.  What is more, we also bought the staff, the nurses, the doctors and the back-
up staff too.  They came over to the NHS.  That was a hospital that had run into trouble for
reasons that we need not go into here.  I acquired that asset because I thought it would bring
benefit to NHS patients, including being able to do more heart operations on the NHS which we
really need to do a lot more of and a lot more quickly.  There are private sector hospitals that are
running now on very low levels of occupancy.  What we are looking at is whether or not we can
more effectively not just contract with a private sector hospital running at low levels of
occupancy; but effectively buy up for a period of a number of years that total capacity and
monopolise it for the benefit of NHS patients.  If you ask me about whether, if another London
Heart Hospital came along with that standard of care in the right place, in London where we
know we have particular capacity constraints that colleagues will recognise, if there were
something similar to that, I would potentially be interested in making a further purchase,
potentially I would.  I stress again that it would be one of a number of relationships that we need
to build with the private sector.  I outlined some of them in answer to Mr Burns's earlier

                        Dr Richard Taylor
  29.  Secretary of State, I have no objection to using the private sector in the short term as an
expedient to help out but I would like to explore some of the objections to using it in a much
wider form in the long term that have been mentioned already.  What we want are actual facts. 
The private sector will cream off the easiest, least stressful bits from the NHS because it does not
do much in the way of emergency care which is the sort of thing that is unpredictable and most
stressful.  Therefore, I am quite sure nurses are leaving.  Why we have shortage of capacity with
theatres in Worcestershire is that theatres are sitting unused in the NHS because the nurses have
left.  What we need to know is the facts.  What have nurses who have left the NHS left to go and
do?  Have they left nursing altogether?  Have they gone to the private sector?  Have they just
moved out of the hospital service into the community service?  The only way you can answer the
worries about the long term loss of nurses to the NHS is if you produce the facts to show that
they are not being lost.
  (Mr Milburn) I am happy to share what data we have on that.  There is one fact I can share
with you and that is the number of nurses is rising, not falling.  With respect, I am sure you were
not saying that they were falling but your remarks could have given that impression.  The number
of nurses is rising quite steeply.  What is more, the number of nurses coming through the pipeline
is set to produce even more increases than we have seen in recent years in the years to come.  For
example, you know as well as I do that the number of applications for nurse diplomas and nurse
degrees is up massively.  They are going to produce a cohort of future nurses on a scale that we
have not seen in this country maybe since the NHS was formed.  You ask me where nurses are
going to when they leave.  My understanding from the figures, as I remember them, such as we
have them   I am very happy to let the Committee have what we have access to   is by and large
when nurses leave they leave for the obvious reasons.  Most nurses still today are women.  They
go off and have a family.  Our problem is that historically we have not been too good at getting
them back.  We need to get better at that and that is why we are exploring how we provide child
care and all of these things.  Is there a big seepage from the NHS into the private sector?  As I
remember it, no, there is not, but I am happy to share the data with you.
  30.  I was not expecting an off the cuff answer in all detail.  What I am asking for is a future
survey over the next few months to see exactly where the nurses are going.  You say there are
more nurses.  We certainly do not notice it in Worcestershire with empty theatres that cannot be
  (Mr Milburn) With respect, that is not such an intellectually robust case. 
  31.  It is a fact.
  (Mr Milburn) I do not dispute that.  There are empty theatres all over the place.  There are
too many people on the NHS waiting lists, waiting too long for treatment but do not fall into this
fallacy that unless you solve every problem you have not solved any problem.  The truth is there
are more nurses and there are more nurses coming through.  I am sorry you do not feel you see
them in Worcestershire, but I will look into how many nurses are employed in Worcestershire
and I bet it shows an increase.
  32.  I have surgeons approaching me who have not done routine prostate operations for 18
months because the theatres that they would do them in cannot be staffed.  The one way you will
help is by putting money in and at least they will be able to do some of these in the private sector
as a short term expedient, which is excellent.  I do not know what to say to this chap who has not
been able, because of shortage of nurses to staff theatres, to do a routine prostate for 18 months. 
I have constituents writing to me who are getting up 15 times a night and they cannot be operated
  (Mr Milburn) I understand that.  As I said right at the outset of my remarks, the biggest
problem we have today is shortage of capacity in the NHS.  If I could click my fingers and
conjure magically out of thin air more trained nurses for Worcestershire today, I would do it for
you.  You know I cannot and I know I cannot, so what we have to do is grow them or bring them
back.  We have brought, in the last 18 months alone   it might be the last two years   a further
9,000 nurses back who left the NHS and have now returned.  Why has that happened?  Because
we have made nursing more attractive by giving them better pay, by improving child care,
improving flexibility and accepting a very simple fact: that they are in the key positions.  As I
said last week, there is a labour market shortage.  The people who pull the strings are not the
employers; it is the employees.  What we have to get much smarter at in Worcestershire and
elsewhere is making sure that we can attract people back on terms that are agreeable to them. 
That means some changes around the very way we employ people, in my view.
  33.  May we have the figures?
  (Mr Milburn) Absolutely.

                             Jim Dowd
  34.  The whole question of private sector involvement, whether through the Concordat or
elsewhere, must be the best possible service to the public and the best possible value for
taxpayers' money.  Any device we can use to achieve those twin objectives is useful, whether
it is the opportunist acquisition of the London Heart Hospital or a more sustained approach.  I
do not have the difficulty that other Members of the Committee seem to have in grasping that. 
You mentioned today and last week the capacity in the NHS sector health care   on an earlier
figure, you gave us about 98.5 per cent   is about 90 per cent.  You said you would like to see
it lower.  You said that last week as well.  That troubles me because the acute sector in particular
is astonishingly expensive.  There is a huge investment of taxpayers' money tied up in that.  I
accept we cannot run them at 100 per cent because of pressures on staff and individuals, but the
second of my twin objectives, getting the best possible value for public money, means we have
to use them as effectively as possible.  In your view, if 89 or 90 per cent is too high, although that
already implies ten per cent slack in the system, what kind of target would you be looking at?
  (Mr Milburn) That is a very good question.  We have commissioned research from York
University which the Committee can see, which indicates that if you get occupancy rates in
excess of 82 per cent you start getting a higher level of cancelled operations taking place at the
last minute, which is hugely frustrating, not just for the patients but for the members of staff as
well.  Staff do not like having to ring up the patient on the morning of the operation to say it is
cancelled.  Occupancy levels give you higher levels of long waits in accident and emergency
departments because the whole system gets log jammed.  The beds are too full partially because
we cannot get a lot of old people out of the hospital and back home for the reasons we discussed
last week.  The consequence is not only felt at the exit end of the hospital; it is also felt at the
entry end, where people cannot get out of accident and emergency or out of the medical
admissions unit onto the acute ward because the beds are too full.  What we have been looking
at very closely is what we can then do to get occupancy levels down from around 89 or 90 per
cent at the moment across the NHS.  In some of the areas where we have the biggest problems
they are higher still.  We want them down towards levels of 82 per cent and some of the things
we will be saying tomorrow will be around the progress that we can make towards that.  That is
really where we need to get to.  It will take some time to get there.  I know that sounds as though,
on the face of it, somehow or other we are making the hospital sector less efficient.  That is not
quite true.  The problem is that it becomes less efficient the more you get above 82 per cent.  89
per cent makes it inefficient because you have all these patients stacked up either in the acute
wards or alternatively in the A&E department.  That is partially a consequence of getting the
relationships right in the hospital between the A&E department and the acute wards further
through the system and then the wards and what happens in terms of discharging arrangements.

                           John Austin
  35.  You will remember this Committee in the last Parliament looked at regulation in the
private sector and I think your predecessor felt that regulation of the private sector was not the
responsibility of the NHS.  We felt it was the responsibility of the Department of Health.  Given
that you want to build this partnership, will you reassess the advantages of bringing the private
sector within the same regulatory framework as the NHS?
  (Mr Milburn) We have to look at those issues.  We have a mechanism with the Commission
for Health Improvement inspecting NHS hospitals and the National Care Standards Commission
effectively regulating the private and voluntary sector, including residential and nursing homes
in so-called social care.  The Commission for Health Improvement, as you remember, when we
put this through the Health and Social Care Act, and the National Care Standards Commission
are empowered to work together jointly, calling staff backwards and forwards and effectively
subcontract some of their operations, one to the other.  That is something we want to see
developing.  We want to see how it works.  Remember, the National Care Standards Commission
is not yet in being and will not be until April next year.  There is an important caveat.  The
Commission for Health Improvement can follow the NHS patient.  If the NHS patient is treated
in an NHS hospital, the Commission for Health Improvement will obviously go to the hospital
and do its periodic assessments.  However, if the NHS patient is treated in a private sector
hospital under the Concordat, for example, the Commission for Health Improvement can still
follow that NHS patient.  In a sense, we already have the makings of what I think the Committee
were concerned about, which is to have one means of regulation for the care system.  What I
would want to see is whether or not those relationships and organisations that we have put in
place really are delivering the goods both to the patient but also, importantly, for the service
provider because I do want to avoid a situation where we have over-inspection and it becomes
overly bureaucratic and so time consuming, particularly for clinicians providing information and
having endlessly to  talk to different visiting groups and inspectors so that they cannot get on
with the job and what they are paid for which is to treat patients.  The answer to the question is
what we need to do is make sure that we have a means of ensuring that regulation is coherent. 
I think we probably have the means to do that.  I want to see how it works.  If I am not convinced
that it is working properly, we will need to revisit it.
  36.  The time frame.
  (Mr Milburn) The National Care Standard Commission comes into operation in April.  The
Commission for Health Improvement and the NCSC have already had the appropriate
discussions about how they can pool resources, and so on and so forth.  I think we want to give
it a year and see how it is operating.  I will be quite happy, it is in the Committee's interest, to
report back, if you want me back.  I can send you a note about what our assessment is.  If I am
not convinced it is working we will need to revisit it.

                           Julia Drown
  37.  I would like to explore the areas in which private sector involvement might be
appropriate in the National Health Service and where it might not.  You said in speeches that
areas like pathology and the diagnosis of treatment are right for further private sector
involvement.  You also mentioned things like private sector management, stand-alone surgery
units and IT systems, in those areas why can the National Health Service not improve its
performance?  What, in particular, are the obstacles that face the National Health Service?
  (Mr Milburn) It can and I hope it is.  If you take somewhere like pathology or radiology,
which in many ways are the forgotten the clinical services in the  National Health Service.  I do
it as well, we talk about doctors and nurses, you do not talk about pathologists or radiologists or
therapists, and so on and so forth.  The truth is the doctors and nurses would not be able to do
their jobs without their back up.  It is worth remembering that six in ten people who come into
hospital now will require some sort of diagnostic test.  Unless we have decent up to date
pathology labs and radiology services then we are going to encounter enormous problems in
getting the waiting times down for treatment.  I think you are aware, as I am very painfully, these
so-called back office clinical services have suffered even more neglect than the front of house
clinical services.  You only have to walk around most pathology labs to see that is the case,
equipment is pretty outdated, the staff, by and large, have an older age profile than many people
who work in the National Health Service and the rates of pay have been pretty appalling for
people.  We have begun to make a difference around that.  Last year, or earlier this year, we
increased the rates of pay for pathology staff quite markedly, which is a very, very important
signal and a first start for those staff.  They are scientists, they are technicians and we should treat
them as such, they are not second rate citizens.  We  are beginning to make a difference there. 
There is money going in.  As you are aware after the last Spending Review we established what
we called the Pathology Modernisation Programme which has spent so far 20 million on 35
projects across the country trying to modernise the equipment, trying to make sure it is up to
date, trying to make sure that if the National Health Service front of house is operating 24 hours
a day one of the big problems we have is in A&E, the A&E department is obviously there 24
hours a day but the radiology services might only be there from 9 am to 5 pm, then you wonder
why people are stuck on trolleys or occupying a bed needlessly just waiting for a test.
  38.  Insofar as there are barriers and people were not paid well enough in the National Health
Service, that barrier is going down.  Indeed, there is an issue there that partly in these areas it is
going against one of the principles that you suggest in your paper that is important, that you
would not want to bring in private sector involvement if it would involve having to recruit staff
in areas where there was a shortage of staff, which is the case in pathology and parts of radiology. 
Why do you think this particular area is right?
  (Mr Milburn) Essentially we have two big problems, one, we have a shortage of staff
capacity.  Radiology, for example, that is our primary worry, although we are well behind on the
provision of CT scanners and MRI scanners compared to other countries in Europe we are
putting that right.  There is a huge investment going in through mainstream capital and also
through the new Opportunities Fund and that is going to really make a difference, particularly
around cancer, and so on and so forth.  The second problem is round the shortages of capacity
in relation to equipment and infrastructure, there the private sector can play a role. The third area
is an important one, at the moment the private pathology services in this country are a very small
element of the National Health Service in this country.  Private pathology accounts for between
five per cent and seven per cent of overall National Health Service pathology capacity.  What we
do know is that in the private sector there is spare capacity in pathology.  What we need to do
is to discuss with private sector providers of pathology services whether there is not a means of
garnering that investment, their resource, their spare capacity for the benefit of National Health
Service patients.
  39.  Is that in consultant time, equipment or  technician time?
  (Mr Milburn) At the moment this is service capacity, it is not just that they are better
equipped and more modern but the services that they have could take more National Health
Service custom.  What we are doing - this might be useful, I am not sure we mentioned this in
the memorandum or not, if we did not forgive me, we have this Pathology Modernisation
programme underway, which is largely being focussed on very small-scale projects until now -
in this financial year is contemplating spending a further 8 million on four large scale pathology
modernisation programmes dotted around the country.  It is entirely possible that one of those
will be a PPP with the private sector.
  40.  Would you support a scheme that moved all existing radiologists or existing pathologists
from an existing National Health Service hospital to a private sector partner if that seemed to be
better value for money and better service for patients?  The extra capacity is already there.
  (Mr Milburn) If we could avoid that that would be preferable.  However, as you are aware
at the moment we have discussions going on in the private sector and with relevant trade unions
about the retention of employment model that we are exploring in relation to  the private finance
initiative, which, effectively, is trying to find a way of ensuring the lowest paid people in the
National Health Service, the cleaners, the porters, the cooks and the laundry workers do not
automatically have to go to the private sector for their employer in the event of their being a PFI
scheme in here local hospital.  We are trying to find a way they can retain their National Health
Service hat on National Health Service terms and conditions.  We are making progress with that
and we are in negotiations and discussions but nothing is finalised at the moment.  If we can
bring that retention of employment option off there it is possible that we could apply that same
model, for example, in pathology labs.
  41.  You would only allow that scheme to go ahead if the clinical staff, as you see it, stayed
as National Health Service employees?
  (Mr Milburn) That is the current position.
  42.  Even if a scheme was put forward by a private company would be better value for
  (Mr Milburn) I should say we have had three schemes to date where we brought the private
sector in for pathology, where in two cases, as I remember it, staff have transferred and in one
case staff have not transferred.
  43.  In the cases where the staff have transferred we have had clinical staff transferring under
a partnership scheme.
  (Mr McKeon) Not the consultants.
  44.  Why is there a distinction there?
  (Mr Milburn) That is why it is important that we try get this retention of employment options
working.  There are good service reasons why we should try to retain people, for labour market
shortage, for the reasons that we set out earlier, but there is also a cultural thing, by and large
people like being part of the National Health Service.
  45.  I agree.
  (Mr Milburn) They are quite important members of staff. At the moment because we are
having to embark on a trade-off between getting additional capacity into the National Health
Service and some members of staff having to leave the National Health Service that is a trade-off
that is currently taking place under the PFI and under the PPPs that we could envisage for
pathology services.  The reason the retention of employment option is actually quite significant,
not just for cooks, porters and cleaners, is that potentially it provides a means of avoiding that
having to be a trade-off.  We need to try to make the retention of  employment option work, if
we can.  All I will say is that it is phenomenally difficult.
  46.  If you had National Health Service management that had things that seem to identify
more with the private sector in your brief, I hope, I am confident that you would say, you would
also be associated with some National Health Service management innovative ideas, risk taking
abilities, and so on, if you had such a National Health Service management that wanted to take
over the maintenance of the building of a PFI hospital and the cleaners or another part of staff
would that be considered or, in your view, does the maintenance always have to go with the
construction of the building?
  (Mr Milburn) Are you talking about PFI now?
  47.  Yes.
  (Mr Milburn) I think there is a natural distinction, to tell you the truth.  Remember what you
are procuring under PFI is a managed asset over a period of years.  PFI is very controversial but
the one great advantage it has is that it gets the local NHS management and the commissioners
and everybody else out of the business of having to worry about whether the building is
maintained for 30 years.  The only way you can maintain the building as new for 30 years, or 60
years, with a break clause usually after 25, is if you have the staff who can look after the
building.  The point I want to make is that I think there is a distinction to be made between those
NHS staff whose necessary function is the maintenance of the building - the engineers, the
ground maintenance people, the electricians and so on - and those people who more naturally are
aligned with mainstream NHS clinical services.  I know you want to come back in but let me
finish the point because this is really important.  There was a view at one time that NHS cleaning
services did not really matter, you contracted them out, you got the cheapest deal, nobody gave
a damn, and people were amazed when hospitals got dirty.  What we have done over the last few
years is try to re-integrate the cleaner back into the NHS team, and that is why we have got the
matron back in fact.
  48.  I accept all of that, but what if  NHS management said, "Actually, what we would like
to do in our hospital is accept one less paint, we will accept 90 per cent of maintenance because
we want instead to experiment and do something different, all the things which the PFI schemes
say, so we can give better value for patients, better service for patients and better value for money
for taxpayers as a result"?  Do you dogmatically rule that out or would you consider such a
  (Mr Coates) Are you the envisaging the trust itself borrowing the money?
  49.  No, somebody else builds the building and they have some staff - cleaning or something
else - but not maintenance staff.
  (Mr Coates) The problem I think is really the security of the money.  You are saying to the
banks which lend the hospitals several hundred million pounds, "Trust us, we will deliver it back
to you and pay the bills on time without any security."  If you are going to do that method, you
have to find some way of the trust itself providing security to the banks, and that begs the
question, who is borrowing the money then, and perhaps you might find that actually the NHS
is better at borrowing money than an individual trust.
  50.  I understand that.  It is a dogmatic rule you have to stick to for Treasury rules.
  (Mr Milburn) Poor old Treasury, it always gets it in the neck.  
  51.  Yes.  A lot of what you have talked about is trying to move away from spot-purchasing
by the private sector and moving instead to long-term agreements.
  (Mr Milburn) Yes.
  52.  If you had those long-term agreements buying operations for NHS patients, that means
private sector nurses in those hospitals providing the support and care for NHS patients.  Is that
any different from contracting out clinical services?
  (Mr Milburn) It could mean the BUPA nurse providing the service but, as I indicated earlier
in the example I was using to the Chairman about Kent, it depends what you are contracting for,
it depends what you are actually buying.  We were talking earlier about the purchase of the
London Heart Hospital, and as it happened the staff came along as a sort of consequence of the
purchase of the asset.  Primarily what we were buying - and it was fantastic to have some more
nurses and great to have some more trained doctors - was the asset.  In a lot of these instances
under the Concordat and under some of the arrangements I outlined to Mr Burns for the future,
what we are interested in is procuring more assets, more capacity, more hardware.  Very often
in these instances, it will as much involve the NHS nurse and the NHS doctor treating the NHS
patient in a different location as it will the BUPA nurse treating the NHS patient in their hospital.
  53.  But in many cases it is the BUPA nurse as well, so in that sense the clinical services are
contracted out?
  (Mr Milburn) It could be but we are not taking a group of NHS staff and lobbing them over
to the private sector, saying, "There you are."  That is what used to happen with cleaners.  We
are trying to get to a position where that does not happen.  What we are trying to do is to
purchase the maximum capacity from the BUPA hospital, or whichever hospital it is, which
happens to get the maximum capacity out of the people they already employ.  It does not involve
the transfer of staff.  If the idea is that somehow or other this is akin to some sort of privatisation
of clinical services, that would be an allegation I wish to refute.  

                           John Austin
  54.  I very much welcome your recognition of the Medical Laboratory scientific officers' key
role in the NHS and the fact they want to work in the NHS, but you recognised in the last pay
round the demoralisation there was amongst pathology staff and that was recognised by the
substantial increase.  In terms of the professions allied to medicine, for those who are outside the
Pay Review Bodies, what is your timescale for bringing them within the Pay Review Bodies
because it is clearly in those areas, where staff have been outside the Pay Review Bodies, where
we have seen the greatest demoralisation and gap.
  (Mr Milburn) There is a negotiation going on.  I am the employer and there are trade unions,
and one of the trade unions' demands, one of the MSF's demands as it happens, is that they want
to have their people inside the Pay Review Body.  But we are in negotiation, in the middle of that
right now.  Agenda for Change, which is the negotiation, which is how we have modernised NHS
pay across the piece, including looking at who should be in and outside the review bodies, has
been going on for some considerable time.  It is slow going, I know that, it is pretty frustrating
all-round, both for the unions and indeed for us, but it is not surprising it has been slow going
when you are negotiating with a whole host of different people with quite different agendas.  I
cannot say when it is going to come to fruition and nor can I say what the outcome will be,
because we are in negotiation.

  55.  We want to look at the overseas patients programme and I will move to Simon Burns in
a moment but on capacity can I ask one final question.  You will remember, when we looked at
mental health, we expressed concerns about the way in which we felt the use of the private sector
had retarded the development of more appropriate accommodation within the National Health
Service.  We gave examples of particular patients placed in private sector secure units in
Yorkshire who were primarily London-based patients, and we did not see a great deal of logic
in that policy when a key part of their treatment was to try and care for them in the community
they came from and had lived in.  My worry about this is that it is very short-term thinking.  You
talk about longer term arrangements, will that include a longer term evaluation of whether the
use of the private sector in what was, in mental health, initially the short-term but it has become
the longer term, is really value for money and offering proper quality services?  Somebody at
lunch time was talking to a health service manager who was telling him he was spending 35
million a year in London alone for private placements of acute psychiatric patients outside
London.  That does not seem to make sense to me.
  (Mr Milburn) The corollary of a longer term relationship, which is what we have been
discussing and what I have been trying to outline today, is that we have to make sure we get the
benefits back, and that means we do have to assess the value for money implications if we are
contracting with the private sector to provide certain services, mental health services, secure
beds, from the point of view of the taxpayer.  That is why I was saying earlier that whilst it has
been true that thus far under the Concordat local health services have very much made their own
deals with the local private sector provider - and frankly have paid quite differential prices as a
consequence - if we have a longer term relationship which guarantees to the private sector greater
continuity of custom from the National Health Service to treat patients, the corollary of that is
that you would expect to see movement on price and expect us to use the benchmark of NHS
reference costs when we are undertaking those contracts.  That will take us into new terrain and
terrain we have not been into so far.  Point one is there will be a deal to be struck.  Point two is
that I think the obligation on us, if we are doing more contracting with the private sector in that
sort of way, in value for money terms will be to make sure we are undertaking the appropriate
monitoring to get the best possible deal for the patients.  I have no doubt that organisations,
whether it be the National Audit Office, or others, will be taking a real interest in this area.  I do
not have a problem with that at all.  The third and final point is that on secure beds, you are right,
historically the National Health Service effectively contracted out the provision.  We are
changing that, as you know.  One of the real things that we have achieved in the mental health
field is to begin to address the real gap in capacity round the secure bed provision.  We have put
in 400 or 500 beds in the last five years and I hope we are getting them into the right areas of the
country. There have been for very many years historical problems in London, which is why you
have patients shipped up to Yorkshire, we will have to address that over time.
  Chairman: Now we go overseas.

                             Mr Burns
  56.  I want to ask you one or two questions about the overseas patients.  I fully accept that
given the court ruling was only three months ago you may have difficulty in answering questions
because it is too soon and things have not bedded down.
  (Mr Milburn) Sure.
  57.  I understand that there are pilot schemes at the moment with some patients going to
Germany.  How do you envisage, if we put aside for a minute the cost  implications or the cost
estimates, on the nitty gritty things, for example, like the travelling from the United Kingdom
to presumably, a logical conclusion, anywhere in Europe for treatment and the cost of taking a
family member with you to look after you and help you both getting there and returning to the
United Kingdom?  What is the situation in those countries? Correct me if I am wrong, in Spain,
for example, you have to provide your own food or the family has to provide the food for the
patient who is in hospital, which is a system totally different to here.  What happens in those
circumstances?  What happens if there are adverse clinical incidents or post operation
complications, who is responsible?  What is the route for help and redress, and whatever?
  (Mr Milburn) I think all of those are very, very telling points, that is why I will start with the
big point and then to deal with some of the specifics.  That is why those who see the sending of
patients from this country to other countries in Europe as a panacea for the National Health
Service are wide off the mark.  I think it can help, I think particularly in those parts of England
that are close to the Continent, potentially it may be attractive for some patients to travel 30 miles
to the North of France rather than travel 30 miles  further northwards in England, it may well be. 
There are a couple of caveats round it that are very, very important, and I will raise some of
them:  (1), if we are going to do this then it has to be with the consent of the patient.  There is no
question whatsoever of sending patients abroad against their will. (2), it has to follow a full
clinical assessment of their needs. (3), we have to put in the place the appropriate arrangements
to ensure that we get good value for money for the taxpayer and a guarantee of clinical standards
of the highest level for patients.
  58.  Can I pick you up on the first one, where you said it has to be with the total agreement
of the patient which, of course, is absolutely right.  Is there not a problem where a patient is
confronted with an either/or situation, where they are told that they need an operation and they
are told that if they want it in London the waiting list, as far as it can be judged, is 10 to 12
months, but you can have it in two weeks' time if you travel to Northern France or Germany. 
That voluntary element is slightly removed in some ways because of the temptation that they
could have their operation in two to three weeks' time rather than having to wait 10 to 12
  (Mr Milburn) Those might be extreme ends of the  spectrum.
  59.  Do you think it would be extreme?
  (Mr Milburn) I will solve that dilemma for people.
  60.  I know what you will say
  (Mr Milburn) The way to do that is to get the waiting times down in this country.  That is
why our effort has to be focussed on the Health Service in this country and expanding the
capacity of care in this country.  That is what we are going to do over time.  We will get to a
position where I hope the people who face an even starker dilemma sometimes, which is the folk
who have a bit of savings, who have saved all their lives and then have to choose between
waiting for treatment and paying for treatment, and at the moment some of them feel compelled
to pay.  That is a terrible situation to be in.  We have to solve that dilemma for them, the way you
do that is by expanding capacity and getting the reforms into the system, which is what we are
trying to do, now.  You are right, in the end the patient is confronted with that dilemma and has
to make a choice based on the dilemma as it is today and not the dilemma which I hope will be
solved in future years.  That is true.  I think there are things that we can do to help now.  As I
said, what we are trying to do is to test this out in three areas, Portsmouth, East Kent, West 
Sussex/East Surrey because it is basically pretty complex, it is terrain we have never been in
before. As you will remember from your own time in the Department of Health the advice that
ministers have always received until this ECJ judgment is very clear, that under the National
Health Service Act 1977 it was not allowed to send patients abroad for treatment except in a
limited circumstances under the E112 referral system with prior authorisation.  The ECJ has
effectively jettisoned that legal advice.  There are a whole host of issues we have to solve.  You
touched on standards, that is a very important issue from my point of view.  What we cannot
have is a sort of free for all where patients are sent abroad willy nilly to any old provider,
regardless of the quality of care, regardless of the back up facilities, that would be a disaster in
clinical terms and it would be very bad for the National Health Service too because the National
Health Service would be paying for the treatment and care.  I can tell you what we are thinking
about, but do not hold me to it, what we are thinking about in outline terms is - Andy McKeon
has been dealing with this for us - I think the best way through for guaranteeing standards is that
we get to a position where we have an approved list of providers.  We are in discussions with 
some providers in some countries in Europe who seem to have a reasonable track record.  I think
I would want to be pretty assured.  Again, I think I may well want to ask the Commission for
health improvement to assure itself that the standards of care are really up to scratch in those
providers, first of all.  That is the first thing we would probably want to do.  Then it would be up
to the local primary care trust in any area of the country, once this thing is running full scale,
which it will be probably from the new year, to decide how it wants to spend its money and
whether it wants to spend its money sending patients abroad or whether it wants to spend money
sending patients to the hospital down the road or elsewhere in the National Health Service.
  61.  One factual point, when you said up and running probably by the beginning of next year,
are you talking about the pilots or the actual system itself?
  (Mr McKeon) We are looking to have the pilots to see if we can make arrangements to send
people for treatment abroad around the turn of the year.  Then after that we will then get the
system up and running and think about having a list of a credited providers, having got the
mechanics sorted.
  (Mr Milburn) Then there are three further things we could potentially do in terms of assuring
standards.  One is if these providers are genuinely up to scratch they will want to assure the local
PCT based on firm evidence of clinical outcomes that they are good.  So there will be paper-
based evidence that the PCT will need to ensure itself of before it sends any patient abroad. 
Secondly, what has happened and what could be drawn on as good practice for the PCTs is what
happened with St Thomas's and Guy's Trust where, as you know, they are involved in an
arrangement with the British Army on the Rhine of accrediting five hospitals there which treat
British soldiers in Germany.  The way that Tommy's and Guy's basically determined the
standards were up to scratch was by sending some of their clinicians to German hospitals and
making sure from a clinical point of view they were happy with the procedure, process and
clinical governance issues.  It may well be that is what we have to do when we accredit providers
and, secondly, it may well be what the local PCT wants to do to act as a failsafe against lapses
in clinical quality.  The third and obvious thing which will need to happen is that the PCT will
want, through the contracting process, to have a contract which ensures certain outcomes and
standards and be able to hold the European-based provider to account if those standards are not
met.  I do not know whether that is helpful, but that is the line of thinking we have on this so far.
  62.  I can understand that.  I also understand you may not be able to give categoric answers
but can I return to the question of costs.  Travel, both for the patient and possibly a family
member to help them and look after them.  I think I am right in saying have there not been one
or two, maybe a few more, patients already treated overseas.
  (Mr Milburn) Yes.
  63.  Under the pilots and those already treated and possibly thereafter, will all the patients
have all their travel costs paid for by the taxpayer, or will the patients and the family member or
whoever have to make a contribution towards their travel costs?
  (Mr Milburn) We are looking at the legal position on this.
  64.  In what way?  If you wanted to, surely you just could, could you not?
  (Mr Milburn) I may have to change the law.
  65.  To pay their travel costs?
  (Mr Milburn) Under the 1977 Act, I think it is, or the NHS Act, as you know the Act
stipulates which services are provided free and which are not.  It stipulates also those areas where
the making and recovery of charges is expressly provided for in legislation.  Transport is not
mentioned, as far as I understand the legal advice we have had.  What you have to do is apply
the model we have in this country.  The model we have in this country is by and large the
patients find their own way to the hospital.  What we do is help with low income families in
particular.  We are in a slightly different ball game, as you will appreciate, if we are having to
put people not on a bus or in an ambulance or a taxi to take them to the local hospital but having
to put them on a plane.  So we will need to tread quite carefully in this area and the truth is today
we do not have an answer to that question.  We are looking at it carefully, of course we are.  Just
for your information, in discussions we have had with some of the European providers they are
trying to suggest to us that what they would be prepared to do is not just offer treatment and after
care as part of a package but also the cost of travel contained within the overall package.  We
have to make sure, again, that represents good value for money.  In the end it will not be me who
is running this scheme, it will be up to the local primary care trusts, that is what devolution
means, they take the decisions, I do not, and they have to decide how to juggle their priorities and
how to spend their money, and they will have to decide whether or not it represents good value
for money.  The guidance I think we will issue to them is that NHS reference costs probably
provide the best benchmark.  There are outliers, as you know, in NHS reference costs but there
is a centre ground within the reference cost index which might suggest to a primary care trust
what they ought to be looking at in terms of what represents good value for money.  The issue
of clinical standards is a very separate thing and I think we have some responsibilities there to
make sure the providers are genuinely up to scratch.
  66.  Have you done any estimate yet, or is it too early, about the likely value for money
implications of this whole thing?
  (Mr Milburn) It depends in a sense on what the take-up is.  If you ask me for my view on the
take-up, I think it is pretty difficult to tell because we have not offered this in the past, but my
suspicion is - a self-evident point - that the NHS at home, whether provided through the private
sector, through the Concordat or through NHS hospitals, is and will remain the first choice for
the overwhelming majority of NHS patients but there will be some patients who will want to go
abroad.  As you know, through the E112 system now in the last year there were around 1,100
patients we approved through quite a complex system.  My guess is that there will be more than
that  who take advantage of the ECJ ruling.  I do not know how many it is going to be but what
I am absolutely determined to do is ensure that the people who get the advantage of treatment
through the new system who could travel abroad do not do so to the disadvantage of other NHS
patients.  It is quite important the money for value test is applied.
  67.  Something has just occurred to me as you were talking.  As a result of what is happening
now, in your mind are you doing it because you believe you have to because of the European
Court of Justice ruling, or on reflection as a result of that are you now thinking that also the
question of choice and helping with capacity problems in this country and bringing down waiting
lists makes it a good idea?  If the answer to those questions were to be yes and yes, logically
there would be nothing to stop you looking further afield for certain serious medical conditions
where there are not the medical capabilities in this country and send some people in certain
circumstances to places like the United States for treatment.  Would you consider that?
  (Mr Milburn) I am not sure we want to stick people with serious conditions on long
transatlantic flights.
  68.  No, but if there was no alternative?
  (Mr Milburn) Shall I tell you what I would prefer to do?
  69.  Bring them here?
  (Mr Milburn) What I would prefer to do and what we are actively doing is, talking to
colleagues in the States, talking to colleagues in Germany, Italy and Spain, and it is just far more
sensible in the great scheme of things if there is spare capacity - for example, as you well know
there is a surplus of doctors in Germany (I wish we have a surplus here, we have not) - if we
could bring some of those doctors here and get them into the National Health Service providing
treatment and care for NHS patients.  That is a much more comfortable and convenient thing for
the NHS patients.  That is how I would prefer to deal with it.  I do not think, frankly, I would
want to get into the position where I send a whole lot of patients to America.  I do not think that
is on the agenda.
  Chairman: We have the world expert on PFI here in Mr Coates; the only person who
understands PFI, so we need to talk to him.  I will bring in Doug first.

                           Dr Naysmith
  70.  I want to direct my first couple of questions to Mr Macpherson who represents the
Treasury and there would be no reason for Mr Coates not to contribute but I think it is for the
Treasury first.  Alan can have a rest.  When we are talking about PFI, and everyone is aware it
is a controversial topic, it tends to focus around value for money and already this afternoon we
have had it raised in that context.  The comparison is often made between PFI schemes and other
methods of funding.  Last week at the public expenditure question session, evidence was given
that showed the value for money benefits of PFI schemes tend to be fairly modest, about 1 to 2
per cent of scheme costs.  The current public sector discount rate is 6 per cent and some critics
of PFI schemes have said that is a bit too generous and therefore favours PFI schemes unfairly. 
There are a lot of people coming in with a lot more detailed questions but do you have any plans
to set a lower rate?
  (Mr Macpherson) I think it is clear that we are currently reviewing our guidance on the
investment appraisal.  There is an excellent document called the "Green Book", which strangely
is green, and this was last revised and published in 1997 and generally this has stood the test of
time.  If you go back in history to the first White Paper on the discount rate, it was in 1967, when
the discount rate was set at 10 per cent.  Then in the 1970s, in 1978, the discount rate was
changed to five per cent real.  That continued through most of the 80s and was set at six per cent
in 1989.  There are clearly a whole raft of issues round this.
  71.  It has not changed since 1989?
  (Mr Macpherson) The discount rate has not changed since 1989.  It has been reviewed a
number of times during that period but, as I said, the government announced last year that we are
reviewing the Green Book and as we do that we will review the discount rate.
  72.  You say it has gone from 10 per cent to 6 per cent at various times, what difference
would a one per cent reduction make to PFI schemes and their value for money?
  (Mr Macpherson) I am not best placed to comment on particular issues relating to the
National Health  Service.  If you look across the public sector most PFI schemes actually have
quite big benefits.  I would be surprised if on average they were only round one per cent.
  73.  It was said between one per cent and two per cent in an evidence session last week.
  (Mr Macpherson) It really depends on what you are doing across the piece on the pricing
guidance.  The discount rate is one factor amongst many.  If you look at projects, both public
sector and private sector, what actually determines whether a project is value for money is quite
rarely the discount rate.  Obviously if you change it by one per cent or two per cent it does have
effects in terms of what the net present value, to use the jargon, is of that project.  There are a
number of issues round the treatment of taxation, round what you regard as the opportunity costs
of public sector investment, which have to taken into account. Certainly if you were to change
the discount rate and leave everything else exactly the same then it is clear that that will change
the return on certain projects.
  74.  The one percentage point could have a very marked effect?
  (Mr Macpherson) I would be surprised if it was very marked.
  75.  Mr Macpherson said he did not know how this applies to the National Health Service,
he was not best placed, it is over to you, Mr Coates, what do you think about this?
  (Mr Coates) I think the evidence to the Committee last week was that it was between a one
and two per cent difference.  There is a question coming up to be answered and the average over
the last 20, or so, schemes is 1.7 per cent.  It is value for money.
  76.  If we move on to something else that came in in your memorandum to this inquiry, is
it conceivable that only four out of 27 PFI schemes have been higher than the public sector
comparator, in other words they were better?
  (Mr Coates) I would like to say something about how we approach these schemes and why
we do value for money calculations.  I think the implication in the question is that we somehow
massage the figures or squeeze them a bit to make them work.
  77.  Some people have alleged that.
  (Mr Coates) What we test our assumptions against is the National Health Service database
of average building costs. We are absolutely confident that we are taking proper risk transfers
in terms of cost and public procured schemes.  Every quarter that database is  uplifted and we
rigorously test the schemes and put through the systems to make sure we not over-egg the
adjustment to the comparator.  We are really looking at 12 to 13 to 14 per cent adjustment in
terms of risk, which obviously squeezes down against the PFI option. We also now determine
trusts that they must use a standard spreadsheet for allocating data so that they always use a
compliant, consistent approach for calculating the value for money sums.  We also take a very
prudent approach in our department our and our colleagues are proud of the way they make sure
they protect the public interest.  They are always showing the trust themselves do not inflate
figures to try and squeeze things throw.  Finally, of course, these risks are real, we are not
making these numbers up.  If you refer to the pages of Laing Construction, they lost 60 million
as a consequence of some PFI scheme and it was recently sold for 1.  I have been around for a
long time and I remember Northwood Norwich was signed and we were told what a wonderful
contractor Laing were, they were the best in the country and we should be very proud to use
Laing.  In terms of that particular contract because of PFI they have taken these risks and they
are bearing the cost of them.  We are not making this up because it sounds good.
  78.  What is the difference between the four out of the 27 schemes that failed the
value-for-money test?
  (Mr Coates) I think the answer to that is 1.7 per cent average.
  79.  The average.
  (Mr Coates) Yes.
  80.  Of all these 12 factors you were taking into account --
  (Mr Coates) That is risk transfer.
  81.  -- what is the difference in the four schemes? It is only purely a financial difference, is
that what you are saying?
  (Mr Coates) There are other reasons why these schemes went ahead.  It is recognised that
certain schemes are not PFI friendly.  We do not waste time and money in testing for PFI
procurement.  Shall I continue on the question?  My personal view is it is no surprise the figures
are very similar, because there is very little difference between the two bags of numbers we are
playing with.  We are looking simply at operational costs for the hospital, 30 per cent
non-clinical.  If you say, what would it cost to build a hospital and operate a non-clinical service
from the private sector or the public sector virtually all of the figures are  the same, so it is not
surprising you get the small difference, because the numbers are the same.  We should not
thinking that as a failure, we should be thinking that as a good result, we are quite rigorous about
it. Finally, and this is really a pragmatic point, I always feel that if you are going to thieve you
have to thieve big, there is no point in massaging the figures for a quarter or half a per cent.  We
get so much grief over it, we take the view of doing it properly and we defend our figures and
the robustness of them because we have it right.
  (Mr Milburn) That does not mean that in future we are going to thieve big.

  82.  The point that emerges is that people do not really trust that when you say things like,
PFI is the only game in town and you think the figures are rigged.  Why is it that there is this
widespread misconception?
  (Mr Milburn) Basically because people have it wrong about PFI, to be blunt about it.  I think
we have to be blunt about our own failures, across government we have not successfully
defended PFI as well as we should have.  Basically, we have had this out with the Committee
before, I think PFI is a good thing not a bad thing and I think so for a number of reasons.  The 
first thing is that although in the public sector comparator what we assume is there is public
sector capable available to build a spanking new hospital, and remember we are building lots of
new hospitals, we have already built eight, we have 50 at financial close, with building works
on the way, we have a total of now 68, including the PFI ones, coming through the pipeline.  The
National Health Service has never seen anything like this.  Although we make the assumption
in the public sector comparator that capital is available, as we all know, despite the fact that we
are putting more capital into the National Health Service through the Treasury than we have ever
done that would not be enough to meet our ambitions around this.  For example, UCLH, which
I signed off recently, is going to be probably the first half billion pound hospital in the National
Health Service.  The idea that if half a million pounds was not available through the PFI route
it would automatically be available from the London Regional Offices Capital Fund that is not
the case, because there are finite resources.  What the PFI is fundamentally about is about
bringing experts from the city into the National Health Service and we just have to recognise that
as a perfectly pragmatic and sensible thing to do.  On average we are getting it at 1.5 per  cent
cheaper than procuring it through the public sector route, that is true, but we are getting other
advantages with it too.  I was very much struck when I was Chief Secretary when I went to open
the first PFI school in North London, and I talked to the head teacher and said, "What is the great
advantage from your point of view of this school being built through PFI, apart from the fact it
is a fantastic-looking school?"  He said to me, "The big thing is I no longer have to worry about
broken windows.  I no longer have to worry have about vandalism.  I no longer have to worry
about the fact this beautiful asset, which is great on day one, by day 30 is going to be in a
deteriorating condition."  That is the beauty we get with PFI.  We get the asset, we get it
maintained as new for a period of 25 years or 60 years, or however long we want it, at the end
of the period, it comes back to the National Health Service, owned by the National Health
Service.  As my predecessor once famously said when asked, "Isn't PFI just privatisation?",
Frank quite rightly said, "The only thing which will be privatised through the PFI is the cost
over-run and the time over-run."  I plead guilty to that one.

                            Dr Taylor
  83.  PFI is so confusing it is an accountant's dream.  I want to ask two questions about best
value which I really do not understand.  How can it be best value from these two points of view? 
Most trusts pay something like 8 per cent of their income in capital charges, which is recycled
into the Department of Health.  Trusts that have PFI schemes are paying 12 to 16 per cent of their
income to investors and that money is lost to the NHS.  That is the first point, shall I go on to the
  (Mr Coates) I can answer that first if you like.  I did some research for the Committee last
year on what would a publicly-funded hospital cost a trust, and I went to the accounts of Chelsea
and Westminster and they paid in the year ending 31 March 1999 14.5 per cent of their income
in capital charges to depreciation.
  84.  So that figure of 8 per cent is wrong?
  (Mr Coates) If you look at the entire stock of the NHS, which is 50 years old, I would
imagine it is about right, but not if you look at a new hospital against a new hospital, not an old
hospital against a new PFI one.
  85.  Okay.  One firm has said in public that PFI projects account for 20 per cent of their sales
but 40 per cent of their operating profits.  It seems you are allowing private companies to take
profits from the taxpayer at twice the rate they can make it in a competitive market.
  (Mr Coates) I think they are saying, are they not, that 40 per cent of their profit comes from
PFI, not they are making a 40 per cent profit.
  86.  40 per cent operating profits.
  (Mr Coates) All that means is that their sales are 40 per cent in the PFI field.  It does not
mean they are making 40 per cent profits.  If you are saying that 40 per cent of their profits come
from PFI, it means that 40 per cent of their sales come from PFI, not profit.
  87.  PFI projects only account for 20 per cent of their sales but 40 per cent of their profits.
  (Mr Coates) Sorry.
  88.  Which strikes me as though they are getting taxpayers' money at twice the rate they
could have got it in the competitive market.
  (Mr Coates) We have obviously looked at the returns made by the construction and
operations industry in PFI to determine if there is excessive profit-making in the PFI field.  You
only  have to look at the wafer-thin margins of both service companies and construction
companies to see that they are making an average profit of around 1 to 2 to 3 per cent of turnover,
which is not sufficient to give a good return shareholders and have a robust company in terms
of investment of profits.  If they are making that ratio of return, it does seem to me it is still in
overall terms not making excessive profits.
  89.  That they are making excessive profits?
  (Mr Coates) No, if those figures are correct, bearing in mind what their overall profit and
returns are, it does not seem to me it is excessive if they are only making 1 to 3 per cent in
  90.  I cannot argue with an accountant on the figures but it strikes me as remarkably odd that
you can make 40 per cent of their profits from 20 per cent of their sales.
  (Mr Coates) But until you see what is in the cost of sales, it is hard to draw a firm conclusion
from those numbers, because you would have to look at what the costs are.
  91.  Okay.
  (Mr Milburn) Richard, can I just make a general point?  You are not saying this but I have
heard it said about the Private Finance Initiative that it is an appalling thing because it allows
firms to make profits out of the National Health Service.  As far as I know, before we had PFI,
the companies who were building hospitals were not building them free.  I do not think most of
them work as co-operatives.  Bovis, Tarmac and all the other big boys are in it for one reason,
and that is to make some money out of it.  The key test for us is whether it represents value for
money for the taxpayer and whether it helps to deal with the Committee's concerns today, which
are about expanding capacity in the National Health Service.  I think the answer to that, for all
of the ludicrous horrifying stories we read in the national newspapers about PFI, is that it is a
huge success story.  It is a huge success story for the NHS, so much so that, as I said in the
memorandum, what I now want to do is take PFI and the successes it has achieved in the acute
sector out of the acute sector into primary care, community services and social services too.
  92.  This is exactly what we are going to discover, Mr Milburn; if it is a huge success story. 
That is what this Committee has to dig out somehow in the next few months.
  (Mr Milburn) The people who have been waiting, as I might have said last week, forgive me
if I did, in Bishop Auckland, 15 miles from my constituency, for 30 years for a hospital, think
it is a success story to have a new hospital.  The people in Greenwich, I suspect, rather like their
new hospital.  The people in various parts of the country, communities which are now getting
new hospitals with all of their teething problems - which are as common to the public sector as
to the private sector - rather like the idea that we are building new hospitals rather than asking
patients to go to old ones and staff to work in old buildings.

                           John Austin
  93.  When we were looking at this before we were looking at some of the repayment costs
post-PFI, and from the figures which were before us, if you remember, in the last session in
April, some of the revenue consequences seem higher than were anticipated.  Can you say what
assessment was made of the capacity of trusts to meet repayments on PFI projects from the
revenue budgets?
  (Mr Coates) I think we made that return to last week's Committee.  All I can talk about is my
experience of working with the Treasury in terms of monitoring PFI schemes, and each year we
report to the Treasury our total revenue calls against PFI schemes as a proportion of our total
HCHS revenue.  The last time I checked it was around 2 per cent of our total HCHS expenditure 
on signed schemes, and I think that included the revenue costs and the services costs attached to
those schemes as well.  I am happy to confirm that figure to you in writing because I have not
got the papers with me from last week's Committee.

                           Julia Drown
  94.  You say, Mr Coates, that your economists are proud of their rigorous assessing of one
scheme against another.  When do they start becoming proud because the NAO Report on the
Dartford and Gravesham Hospital showed that the public sector (inaudible) was overstated by
some 12 million.
  (Mr Coates) I think they would say that the methodology was correct but the sums done by
the trust advisers were incorrect.  They did not criticise how we assembled our numbers, they
said we could not multiply properly.
  95.  So the economists were happy with the theory but the numbers might be wrong?
  (Mr Coates) The difficulty when you get any proposal for a major PFI scheme is that it
contains thousands and thousands of lines of data ----
  96.  I appreciate that.
  (Mr Coates) ---- and hidden formulae to determine these numbers, and sometimes these
errors do get through.  We have responded to the concerns the NAO raised and we have now
changed our approach so we stipulate how we calculate the particular numbers.  That issue, from
memory, was around the inappropriate use of (inaudible) and the calculation cost increases and
we issued guidance to help in that regard.
  97.  Secretary of State, you said that basically following your predecessor you are privatising
cost overruns and time overruns.  It might be useful for the Committee to have a note or for you
to say very simply how you value those.  That is, I think the public find that difficult.  How do
you assess the price of the cost overruns?  Your evidence actually shows public sector schemes
are getting very good at delivering costs and times to budget.  If you go down the schemes you
have listed here everything is on time and to budget in the public sector.
  (Mr Milburn) There have been conspicuous public sector buildings - people in glass houses
should not throw stones - which have been subject to substantive cost and time overruns.
  98.  Do you accept the National Health Service are getting better at managing that?
  (Mr Milburn) The point about the way that we procure traditionally through the public sector
region is there is no real incentive on the contractor to come in on time or on cost.  By and large
what happens in the real world is they know a new National Health Service hospital is a precious
thing, precious to the trust and precious to the government and they assume that we will bail
them out.  The truth is that is what has  happened.  Chelsea & Westminster is a great example
of that, we bailed them out, we are still bailing them out today as a consequence of that.  The
beauty about PFI is that it lodges the cost and time overrun risk with the private sector.  If they
run over they get penalised and they do not get money until the hospital is built.  That is a very
big change.  We have a methodology for doing that, the National Health Service estates have a
20 year database which assesses the cost and time overruns of different forms of procurement.
We can apply that methodology to the public sector comparator and do so not in an artificial way
but in a way that is built on real data.  Which is why it is so irritating and frustrating when one
hears this is all accountancy-speak and fiddled in order to get the PFI through.  There is a very
rigorous methodology, indeed, which applies real data to how we decide whether to procure
through the public sector or the PFI route.

                           Andy Burnham
  99.  I would like to turn to the cost of the contracting process.  I note from your
memorandum, this is worth putting on the record, 80 million was spent by the Conservative
Government, and not a brick was laid, on PFI.  So far 27 million was spent on advisers' costs on
about 15 schemes.  That strikes me as a much better record but still possibly too high.  Am I right
that  that does not take in the man hours lost through senior trust staff having to spend a great
deal of time managing every bit and every nut and bolt of these contracts?  I was wondering if
you can answer the latter point?  Now we have a band of experience and expertise in the National
Health Service managing these complex contracts do you expect that cost to start falling and is
there any evidence of that?
  (Mr Milburn) I can give it to you.  I can give evidence that it is falling and we would share
this data with you.  The first deal that we signed was Dartford and Gravesham, the first PFI
hospital to get built, on that one, which I gave the go ahead for in July 1997, when I was Minister
of State, the legal advisers' costs were close to 1.25 million, the financial advisers' costs were
just under 1 million.  The closest comparable scheme more recently is Dudley, the legal costs
were down by one third to 800,OOO, the financial advisers' costs have more than halved to
435,000.  There has been a substantial improvement but we need to take it further still, of course
we do.  As far as average legal fees and average financial fees are concerned between the first
wave of PFI and the second wave of PFI on legal fees we have seen a 41 per cent improvement,
41 per cent cheaper to the National Health  Service, on financial fees a 48 per cent improvement,
48 per cent cheaper to the National Health Service. What that shows is as the market matures as
we get more expertise as well we are getting better at doing it. Your essential point about the
time that it takes for trust management to conclude a PFI deal is one that worries me.  Essentially
what we are asking the trust chief executives, who are pretty busy people with complex
organisations, is to undertake a once in a lifetime deal - there will not be another new Greenwich
hospital for some considerable time - and we put them into a difficult negotiating legal position
with people who know their business well and we ask them to conclude deals worth 100 million,
a quarter of a billion, now up the half a billion pounds, they only do that once.  What we have
to do is give them a lot more support, which is why we try to strengthen Peter Coates' operation
rather than have the wheel reinvented.
  100.  On that particular point, given there is considerable expertise out there, with people who
are not going to do it again, does it not make sense to go one step forward and make the National
Health Service the risk bearer in making a contract with a private firm, so that trusts are free to
carry on doing it.  If  the private sector make a deal with the National Health Service you assume
there is less risk for them, and that may or may not lead to financial trouble?
  (Mr Coates) There are two problems with that proposal, the first is a legal one, I do not think
the Secretary of State can contract on behalf of National Health Service trust just yet.  Second,
one which is more important, is accountability and delivery.  By giving the power to make the
contract happen, make the scheme happen to local trusts it empowers the process and it gives the
local trust the will to deliver to the hospital what they would want, whereas the centre would tend
to give its own priorities.  There is a good dynamic that we want to keep, we want to deliver. 
What you suggested is to try and bring the people who have done this scheme into the centre. 
We will do, we will bring somebody in who has done a major PFI scheme into the centre of a PFI
team, along with a lot of other secondments and increases in permanent staff to try and improve
the knowledge basis across local government.
  101.  The average cost, I believe, is 2.2 per cent, I presume that does not include the
opportunity for trust man hours on the PFI and it does not include the private contractor's costs. 
One would assume it would be past on to a unitary payment.  There is an  interest for and making
this process much sharper, quicker and clearer.
  (Mr Coates) We introduced the standard form of contract, which is obligatory in all PFI
schemes and I believe that saves 200,000 to 300,000 per transaction.  It uses a standard
contract, non-negotiable.  We introduced the standard payment mechanism to negotiation round
the paying scheme.  We say that the standard central guidance is on what level of output we
want, what level of fault we want from the contractor and we negotiate agreements with major
contractors, agreements about what information is required by both sides.
  102.  With all of those measures, 2.2 per cent do you have a target for what you want that to
fall within?
  (Mr Coates) Originally in 1998 we said between one per cent and two per cent.
  103.  You want to fall to one per cent.
  (Mr Milburn) We are getting mighty close to that.  The benchmark, and in my view there
should be parity between the public sector costs, if you are procuring through traditional
exchequer capital, or PFI.  The benchmark should be same.  We are moving pretty rapidly in the
right direction.
  Jim Dowd: The PFI is as much about the management of capital projects in the public sector. 
Secondly, is it not true that in many cases the choice is not between PFI funding capital work and
publicly procurement but between getting done through PFI and not getting done at all.  Why do
you think the level of returns for PFI in the Health Service has been somewhat less than in other
sectors?  Is it because of the exclusion of clinical services?

  104.  I am sorry, we are going to have to adjourn the Committee.  Obviously the division bell
has gone.  I would like to follow up on behalf of the Committee a number of questions we have
missed, Jim's question in particular.  We do have you back here in December, would it be
possible for you to be accompanied by your boffins, shall we call them, so we can explore further
the detail of PFI?  Would that be acceptable?
  (Mr Milburn) Absolutely.
  Chairman: It would be helpful for the Committee.  Can I place on record our thanks to you
all for coming, and to you, Mr Milburn, particularly.  Thank you very much.