Is PFI profit really a waste of taxpayers’ money?

August 31, 2017 12:05 PM

PFI has long been a dirty word, synonymous with the worst excesses of private enterprise – ineffective, overpriced and more than a little too close to the state. Instead of embodying a happy middle between market provision and universal service, it has been portrayed as the worst of both worlds.

A new report published by the Centre for Health and the Public Interest (CHPI), a think-tank and a registered charity, aims to cement that image by focusing on the profits made on those contracts which, in their view, are unjustifiable. Researcher’s headline figures show that in the past six years £831 million has been made in pre-tax profit by PFI contractors, which could otherwise have been made available for ‘patient care.’

But the research is plagued by a misconception about the role profit plays in provision of public services. Take the following excerpt:

“The cumulative deficit of all NHS hospitals over the period covered by this study was £3.4 billion. The impact of this underfunding would have been reduced by just under a quarter if the £831m in pre-tax profits made by PFI companies had instead gone to fund patient care.”

Or:

“This means that around 8% of all the money which the NHS has paid to these companies over the course of these 6 years has left the NHS in the form of pre-tax profit and is not available for patient care.”

Yet is it really true to say that those funds have ‘left the NHS’ and are ‘not available for patient care?’ Do we really get absolutely nothing in return for that £831 million?

The reality is that it is simply not possible to divide a contract in this way, just as it is not correct to say we definitely would have got the same hospital for the amount spent on it by the contractor. That’s a bit like saying a Government could get any complex product or a service simply for the individual price of its ingredients. Or that we should treat a breakeven cost as the ‘fair’ price, with everything on top unjustifiable exploitation, at least when it comes to provision of public services. The agreed price contains a projection of a profit margin – there is no guarantee.

The ability to finance, build, run and maintain a hospital effectively is not something which has no cost beyond its constituent parts. The seminal NAO report on PFI makes it clear at the outset that, whatever else might be said for PFI, ‘most private finance projects are built close to the agreed time, price and specification’ and ‘public bodies using private finance are normally satisfied with the services provided.’ That is not to say that hospitals built in-house cannot meet those requirements, but the extensive list of public construction projects suffering from delays and cost overruns – such as the construction of Holyrood – means that a good record on those has got to be worth something.

Further, the risk is on the contractor and not on taxpayers. Changes in global construction markets, in the cost of raising capital or alterations to employment law impacting on the cost of labour are just some examples of risks which will exert pressure on the profit margins of these contracts, and given they can last up to 40 years, there is a whole host of risks that these providers are taking on and should be rewarded for.

By contrast, the Government is insulated – their annual payments are fixed. Which in turn means that the PFI structure functions to incentivise good, efficient management, something which CHPI appears to be taking for granted, if only hospitals were transferred under direct Trust management.

There are undoubtedly examples of PFI hospitals (or indeed other public projects) where this process did not work as expected. It is also true that there are adverse incentives for Governments to use PFI, because the liabilities resulting from them are kept off the public balance sheet, and so off the debt and deficit statistics. But does this condemn the entire idea behind private financing? In truth, PFI should be regarded as one way of raising finance, appropriate in some instances but not in others.

In short, PFI is simply a means to access private sector management expertise and offload some of the project risk. It is an imperfect measure which never claimed to be a silver bullet. But neither is it privatisation by the back door.