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Public money - private profiteering

As NHS hospitals struggle to make £20 billion in cuts imposed under the previous New Labour government’s spending plans, a select group of large building contractors and developers will be smiling all the way to the bank.

Wards will close, operations cancelled and staff laid off to balance the books by hospital trusts that have new or modernised buildings. These were built under the so-called Private Finance Initiative (PFI).

New Labour championed PFI as a way to get new hospitals, schools and houses built without direct public spending on the projects. Instead, under PFI the private sector builds the schemes and the public sector leases them back over 30-40 years, effectively taking out an extremely long and costly mortgage.

Over 100 hospital schemes have been built at a value of £11.3 billion. The trouble is that the final bill works out at six times that figure at £65bn. And some NHS trusts are making annual repayments of more than 10% of their turnover, according to figures obtained by the BBC.

The case of the Edinburgh Royal Infirmary is particularly notorious. NHS Lothian will be a tenant for another 40 years. By then the total paid for a hospital which cost £190m to open in 2003 will have topped a staggering £2.4 billion.

The thing is, however, that if hospitals aren’t able to make the payments, the government will step in because ultimately these are state-backed contracts and will always be honoured. So the contractors can sleep happily in their beds, enjoying a guaranteed income stream, while the sick suffer.

Dr Mark Porter, of the British Medical Association, added:

Locking the NHS into long-term contracts with the private sector has made entire local health economies more vulnerable to changing conditions. Now the financial crisis has changed conditions beyond recognition, so trusts tied into PFI deals have even less freedom to make business decisions that protect services, making cuts and closures more likely.

And it’s not as if PFI contracts are good value for money. Public finance expert Allyson Pollock believes the bidding process is almost certainly rigged. One third of PFI projects attracted two bidders or fewer between 2004 and 2006 mainly because of lack of bidder interest.

PFI schemes are characterised by a small number of very large firms competing for contracts; very few firms have the economies of scale and financial muscle to lever in funds, while the high bidding costs and tendering periods act as serious disincentives. In several cases there has only been one bidder.

Research shows how PFI hospitals on average almost double in costs, with significant changes to the design and specification, between the start and finish of the process. At University College London Hospital, the costs of the PFI project increased from £120m to £430m in the three-year period prior to signing off. Fewer beds and facilities than originally planned was one result.

It’s a similar story with local authority housing modernisation schemes, according to a recent report. And in London, a variant of PFI has cost council taxpayers billions after a contractor literally went down the tube and others demanded higher payments. Gordon Brown was the architect of that particular disaster.

Contractors have also benefitted from refinancing deals at the expense of the taxpayer. In the Norfolk and Norwich hospital PFI scheme, refinancing increased the investors' rate of return from 16% to 60%. It’s a case of the private sector running rings round public officials who don’t have the expertise to cope with complicated refinancing deals.

This particular burden of debt is one but example of how society is oppressed by contractors, land owners and financial markets. Interest payments on the national debt this year alone will amount to more than £40 billion. That’s a straight transfer of wealth from taxpayer to profit bloodsuckers. It’s got to end sooner rather than later.

Paul Feldman
Communications editor
13 August 2010

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