Do not overlook the real achievements of PFI

Between 1995 and 1997 I was engaged in working on two hospital private finance initiative schemes. Both went on to complete – one harshly held back by the purdah period that preceded Tony Blair’s first Labour administration.

In a sense this was a tall order, an initiative that linked private finance with public health (the NHS) was always going to be a big ask for some. This process was made a great deal easier by the election, by landslide, of a Labour administration – then apparently much more trusted with the NHS.

Current prospective

Thus it was disheartening to hear the current prospective Labour administration decrying PFI with a scant regard to the history and the legal background. This more so when most of these schemes have now run a little more than half of their original concession period so that that very considerable amounts of capital invested will have been repaid.

This also overlooks the very real achievements of PFI and the difference that it has made in the improvement of NHS facilities.

Let us remember the state of play in the mid-1990s:

• The public hospital facilities were most definitely not “fit for purpose” and some were downright dangerous
• The NHS estate had been neglected by decades of backlog maintenance where repair and refurbishment budgets had been plundered to cover short term cash requirements
• There was absolutely no public service budget for capital spending. The UK confidently expected that it would enter the euro and the pound needed to be ready. There was no room to expand the public sector borrowing requirements
• As a consequence, major public service building contractors were on their business knees financially and their banks were not willing to fund traditional long term building contracts
• The building contractors were also devoid of imagination as to new ways of development approach
• The only option was project finance provided through non-asset backed special purpose vehicles where the whole risk was eventually absorbed by lending banks who expected that risk to be recognised and potentially rewarded
• The schemes had to be off balance sheet for finance provision and they were so seen to be
• Every opportunity had to be taken to shrink the actual cost of the facility; proven to make any development possible.

Against that background it is not surprising that some harsh deals were struck; eg:

1. On facility completion the developer’s financing costs could and would be reduced on refinance. This opportunity was factored into concession fees – well advised trusts managed to procure a share of refinancing gain;

2. If the scheme was established in a way to minimise taxation, once in profit, by external domicile that could be factored into the original concession fee model.

Now, of course, everyone knew that the whole scheme cost would be more than the simple capital grant paid in front for the whole scheme; but that is no different from a young couple buying a home with a 30 year mortgage. The actual whole life project costs will be vastly more than a cash purchase – but those without cash, if they wish to acquire, must accept the opportunities the market has to offer.

Also, all the schemes were effectively underwritten by statute by an enactment which guaranteed that a public sector covenant would always be available to ensure trust performance over the whole project life.

What was achieved?

• Scores of state of the art modern hospitals replacing the pre-1948 stock and laying the foundations of a modern hospital service
• To a greater or lower extent a contractual cap on the cost of servicing the concession
• No public sector capital investment was required
• This outcome, which was enabled by the NHS purchaser provider split, placed a heavy burden on current account finance charges (concession fees) but it was anticipated that growth in the economy would have taken care of fees just as the struggling mortgage borrowers anticipate that the burden will be eased by improved financial resource. Sadly that did not happen.

It is wrong to blame the scheme for changes in economic factors some 10 years after many schemes were signed.

Cancelling the initiative agreements

Short of statutory expropriation, which would be hugely damaging, it is just not possible to simply take back the contracts. The benefits granted are contractual concessions which simply cannot be cancelled. A buyback would be very expensive. Compensation free expropriation would do huge damage, even if legally possible, to UK plc’s global credit rating.

Trusts may now find it worthwhile to investigate the current status of their hospital facility concessions and understand what options may be available 

Absent an expensive agreement, which would have to be funded by government from somewhere, the only route would be microscopic review of concessional performance in the hope of identifying a pattern of contract breach which justified termination of concession.

The cost in armies of project managers, solicitors and counsel, let alone the drain on available management resource would be disturbing.

Such negotiation/litigation could take more than the lifetime of a Parliament.

If the 15 year plus established experience of the concessionaries is to be trashed, who will replace that expenditure and at what cost?

Is it really a good idea to devote years of time and expense to a war of attrition with established and well-resourced partners in projects? How will that serve the best interests of patients? What would the Care Quality Commission and NHS Improvement have to say? Might this damage ratings? What about staff morale?

While the immediate attraction of the elixir which provides a risk free panacea for all concerns, may be appealing, closer examination will reveal it to be fraught with difficulty and hidden cost.

Some concessions may be willing to sell out. Others may value the long term secured current investment.

Just as trusts at the front of new thought leadership secured modern hospital facilities at the turn of the century, trusts may now find it worthwhile to investigate the current status of their hospital facility concessions and understand what options may be available and try to get ahead of the game.