Learning from Britain's mistakes

19:44, Mar 12 2012

Dr Mike Beard warns those advocating private financing for public hospitals to take heed of Britain's experience.

Increasing demand, a finite budget, and Treasury policy have forced public organisations such as district health boards to look to the private sector for help with funding.

The Government recently instructed the Canterbury DHB to consider a public- private partnership funding model when planning for the rebuild of Christchurch Hospital.

The CDHB and the Government must learn from the British experience, where public-private partnerships for public works are known as private finance initiatives (PFIs) and have been used for more than 20 years.

In Britain, PFIs as a way of funding hospitals are "now dead in their current form", according to the Financial Times and are being subject to Treasury and Government review.

The usual form of PFI in Britain means a group of private companies raises the funds to build a new hospital.


They design and construct the hospital. The public hospital then repays the loan, but is also locked into a range of long-term contracts for hospital maintenance, catering, cleaning, parking, laundry; almost everything except clinical care.

These contracts typically run for 30 to 40 years. How do you predict what will be needed in that period of time?

In Britain, these arrangements were insisted upon by the Treasury; it liked the way the public sector did not have to put the money up front, and the accounting method used meant that the loan did not appear on the public sector balance sheet. None of these contract negotiations were open to public scrutiny.

It has become controversial because it is realised that this form of PFI may not give the taxpayer value for money.

PFIs may be more expensive than conventional funding and have many undesirable long-term effects. The repayment costs may be excessive and not only in monetary terms. The ongoing contracts may interfere with the design and running of the new facility.

There is now good evidence that PFIs can distort future planning and lead to too many large hospitals. There may not be enough money to open all the beds. High-cost or inappropriate service contracts can also make an acute hospital uneconomic to run. If the hospital is obliged to cut funding to avoid bankruptcy, then cutting clinical services may be the only area left to make savings.

What are some of the difficulties that have occurred with the currently constructed PFI contract system in Britain?

PFI have funded more than 100 National Health Service (NHS) hospitals at a capital cost of [PndStlg]12 billion, and long- term repayments of [PndStlg]72b.

This is a vast experiment, since there is still no good evidence that this method of funding is the cheapest in the short or long term. Indeed, there is evidence that it is more costly - as much as [PndStlg]20b more expensive for the British PFI hospital schemes already in place.

Financial agreements behind a PFI have been exempt from public disclosure under the Freedom of Information Act on the grounds of maintaining commercial confidentiality.

PFI funding should appear on a government departmental budget in the same way as direct capital expenditure. At present it is regarded as being transferred to the private sector and thus "hidden". Clearly smart, but improper, accounting.

Last month, some NHS hospitals were given [PndStlg]1.5b emergency funding to enable them to repay PFI debt and to avoid financial collapse. PFIs were supposed to transfer risk to the private sector, but this [PndStlg]1.5b came from the taxpayer.

The Royal Bank of Scotland had previously been rescued by the taxpayer to at least [PndStlg]70b.

The RBS invested in PFIs and when those PFIs got into trouble the taxpayer bailed RBS out again.

Under most PFI contracts, investors must be repaid ahead of clinical services and this may directly impact on the quality of clinical care.

Despite the 100 new hospitals, the number of hospital beds has fallen in Britain, making it impossible to control outbreaks of MRSA or Norovirus.

When the Scottish Health Authorities decided to make hospital car parking free, all hospitals complied except the three PFI hospitals which were locked into 40-year parking contracts.

The above comments illustrate that the way PFI has been introduced in Britain verges on a gigantic scam.

How could the Treasury embark on a [PndStlg]84b ([PndStlg]12b plus [PndStlg]72b) experiment without good evidence to show that this is the most economical way to spend public money? One reason could be the secrecy enforced on contract negotiations by commercial sensitivity.

Clearly the private sector thought it was a good deal, and the public sector was too feeble to ensure proper contractual arrangements. There is now good evidence, in Britain at least, that the PFI structure is at an end because it has been a failure.

Private-public financial ventures are often essential, but must be fair to both sides.

What implications does this have for the provision and development of healthcare locally?

To a large extent, the Canterbury District Health Board has to follow Government health policy. Funding is usually dictated by the Treasury.

One hopes that it will take notice of the recent reviews of PFI systems announced by the British Government, and assess all other ways of raising any money required in an unbiased manner.

Integration of public and private healthcare sectors has the potential for more efficient use of existing facilities and new services.

However, getting these two sectors to work together in a way that is fair to the taxpayer is a challenge that has often been unsuccessful both here and overseas.

If you need something, out comes the credit card and it is yours. You are then locked in to paying the money back, often at a high interest rate. Perhaps you could have made do with what you already had, or got something cheaper or more modest.

A PFI is exactly like that credit card, and the danger is that politicians, and those that serve them, may only see the short-term benefits. Any proposed PFI arrangements in New Zealand must be critically assessed in the light of the British experience.

Any economic analysis must include the full implications of all long-term contracts entered into, particularly with reference to future clinical care and hospital organisation. Any PFI agreement must not compromise clinical standards. Secrecy must be held to the absolute minimum and the public be involved in a transparent way.

This will ensure that anything daft or devious will become apparent to all concerned. Above all, the CDHB must make sure that all ways of raising money for this development are fully explored.

* Dr Mike Beard (FRACP, FRCPE, FRCPath, ONZM 1998 for services to medicine), was clinical director of haematology and general medicine at Christchurch Hospital between 1976 and 2000. In the 1990s he was a medical adviser to the CDHB. Between 2000 and 2010 he worked on locum consultant contracts in New Zealand and Britain, including at one PFI-funded hospital. He was a member of the CDHB Hospital Advisory Committee. He retired from clinical practice in November 2010.

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