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New Labour's devastating legacy

Take one struggling NHS Trust, add in an exorbitant build-and-maintain private contract – all this is New Labour’s handiwork – and the result is a financial disaster containing a threat to patient care.

Today’s government announcement that 22 trusts, which run 60 units, cannot afford their exorbitant “private finance initiative” (PFI) payments and have lost financial stability only confirms the worst. For some trusts, annual repayments take up more than 18% of their turnover.

PFI deals, under which the state enters into a cast-iron mortgage-leaseback deal with developers who own the assets and receive an annual fee, were favoured by New Labour for two reasons.

First, the cost of building hospitals, schools and other infrastructure did not appear on the government’s balance sheet (although it involves a state liability). Second, it fulfilled New Labour’s dream of private-public partnerships as an exemplar of 21st century capitalism.

The dream has, inevitably, turned into a nightmare for taxpayers and patients alike. Some hospitals were smaller than they might have been to allow for repayments, while PFI contract costs have become unmanageable. Professor John Appleby, chief economist at the King's Fund think-tank, says that there is already “a drive to keep patients out of hospital”.

The contractors are laughing all the way to the bank, however, as the state is obliged to pick up the tab if the NHS Trusts can’t. Renegotiation of the contracts is virtually impossible because lenders know the government won’t let the trusts go bankrupt.

Official figures show that yearly bills will rise by 75% in the next 18 years. By 2049, more than £70 billion will have been transferred from taxpayers to private investors.

Even taking services like maintenance into account, this sum is far above the £11.4bn value of the building projects.

According to a Commons committee, the taxpayer is paying well over £20bn in “extra” borrowing costs – the equivalent of more than 40 sizeable new hospitals – for the 700 projects that successive governments have acquired under the PFI.

Last month, the Commons public accounts committee found that tax assumptions built into the case for PFI contracts were laughable.

One of the largest PFI investment funds told the committee that 72% of the shareholders of its management company were registered offshore. HICL, a subsidiary of HSBC, which made £38m of profit from 33 PFI schemes paid just £100,000 in UK tax. Ultimate ownership of at least 90 projects has been moved offshore, potentially avoiding tax payments when they are sold on again.

The PAC report says that there is a “buoyant and profitable” secondary market in PFI deals.  “We suspect that initial investors are able to make excessive profits from selling PFI shares, yet we lack the information to know for sure,” MPs admitted.

Figures from the National Audit Office suggest that up to £4bn has been paid in fees to financial consultants, lawyers and others to get the projects off the ground. The head of one big PFI investment fund earned £8.6m last year.

Health Secretary Andrew Lansley said: "The truth is that some hospitals have been landed with PFI deals they simply cannot afford... Like the economy, Labour has brought some parts of the NHS to the brink of financial collapse." Yet PFI goes on and on.

Since the May 2010 election, however, the Conservative-Liberal Democrat coalition government has signed 34 contracts with a capital value of £1.8bn ($2.9bn), according to the Treasury. Hundreds more contracts are in the pipeline for schools and other projects.

The continued commercialisation of the NHS, with the direct injection of competition by the Coalition, is bound to favour healthcare corporations. Like New Labour before them, the Tories know how to favour their friends and keep capitalism happy.

Paul Feldman
Communications editor
21 September 2011

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