THE figures just did not add up. A project with a supposed price tag of £360 million had seen projected costs spiral to £1.1 billion and so the plug was pulled.
It emerged on 22 June that the private-sector plan to build a new healthcare and research centre at Paddington in west London had been scrapped. And this was after £14m in public money had already been spent.
The decision was seized on by critics of public-private projects. Dave Prentis, general secretary of Unison, described it as “a criminal abuse of taxpayers’ money”.
It was not the first blow to such projects, described either as PFI (private finance initiative) or PPP (public private partnership). Just a week before, the Ministry of Defence shelved a £1bn PFI scheme to provide training on armoured vehicles, fearing it would prove poor value for money.
The previous week, on 9 June, Bob Ricketts, the health department’s head of capacity planning , whose role includes ensuring there are sufficient beds for patients, said the NHS was building unwanted and inflexible “monuments” on 30-year contracts through PFI. Many of these, he said, would be redundant within five years.
What was needed, said Ricketts, was more “cheap and cheerful” buildings with a lifespan of between five to 10 years. Quoted in the Health Service Journal, Ricketts said: “I’ve seen some awfully grand PFI schemes that are starting to give us real problems in our capacity mapping. We need a fundamental rethink.”
The comments took on and furthered earlier remarks by health secretary Patricia Hewitt, who said fewer large PFI projects would be built in future.
She warned against an over-dependence on monolithic new hospitals. “There are some things you only want done in a large, acute hospital. There are other things, including quite a lot of diagnostics, that are better done in a primary health centre, “ Hewitt said.
She insisted, however, that she has no desire to jeopardise the 26 PFI hospitals that are out to tender or nearing financial close.
Meanwhile, home secretary Charles Clarke has said the private sector’s role in prison building projects will be “reviewed” and that any further building under PFI would be put on hold.
Do these signals mean that Tony Blair’s government has fallen out of love with PFI? And is that view shared by the Scottish Executive?
Since 1997, this controversial funding mechanism has enabled Tony Blair’s government and the Scottish Executive to ratchet up spending on major capital projects, particularly hospitals and schools, without much debt being lumped onto the government’s balance sheet.
But there are a number of factors that have cast doubt on PFI as a means of funding.
In April 2004, the government brought in what is called prudential borrowing for local authorities, which meant they could once again issue debt to fund their own capital projects.
Then, last month, the Office for National Statistics put a further spanner in the works. It ruled that billions of pounds of capital spending under PFI is going to have to make an appearance in the public sector’s net debt figures.
This would erase one of PFI’s most alluring charms for government. No longer could billions of pounds of public sector debt be shifted off balance sheet and into “special purpose vehicles” established by the private sector.
There are other problems in the detail of schemes, with increasing questions being asked about how “user friendly” some projects really are for public sector bodies.
One of the big questions is over the length of term of PFI deals. Contracts routinely stretch for 25 to 30 years — and can be extended to 50 to 60 years where refinancing occurs.
There are questions, too, about the flexibility of such deals. In the lengthy preliminary discussions that take place before a PFI contract can be signed, detailed technological and facilities management requirements must be hammered out in detail. The bidding consortia and the commissioning body do all this specific nitty gritty work before “financial close” can be achieved.
Allyson Pollock, professor of public health at University College London, said: “Of course it is possible to reconfigure a large hospital such as the Edinburgh Royal Infirmary to suit changing medical needs. The trouble arises because it is very expensive to change the contract that the health board has with the special purpose vehicle.”
Edinburgh Royal Infirmary (ERI) is a large PFI project which was opened in January 2002 by Consort Healthcare (a consortium led by The Royal Bank of Scotland and Balfour Beatty). After a breakdown in dispute resolution talks, Consort and NHS Lothian are set to clash in the Court of Session before the end of October. The case followed the health board’s refusal to stump up the additional £1.1m Consort is demanding on top of the existing £40.75m annual fee paid by NHS Lothian.
Consort believes it is owed the extra cash — £30m over the lifetime of the contract — over and above the £7.5m it receives annually for services such as patient movement, portering and security, after a recent benchmarking exercise.
But NHS Lothian argues the increase could only be justified in the event of fresh demands on Consort, such as the opening of additional wards.
“The problem is that they are getting paid for 291 staff, but they actually have 396, “ says Tom Waterson, Unison’s branch chairman for Lothian health. “If Consort Healthcare is able to win this case it would be the biggest con of all — it would prove there’s been no risk transfer [to the private sector] whatsoever.
“The mere fact that the annual running costs at the ERI have risen from £31m to £41m in three years shows this has been a massive mistake which the people of Edinburgh and the Lothians, their children and grandchildren, will be paying for for generations to come.”
The situation has led MSPs to call for a review of PFI benchmarking procedures, which they fear could significantly raise the cost of schemes across Scotland.
But Jo Elliot, chief executive of Edinburgh-based investment bank Quayle Munro, which is involved in PFI schemes both as an investor and as an adviser, says some of the criticism is unfair. “The most important thing is that the Edinburgh Royal Infirmary was built on time and that services are being provided, “ he says.
“There has been a lot of bad mood music around the ERI, but much of that has to do with things like car parking and its location, neither of which have anything to do with the fact it is PFI. But it is always the PFI that gets tarred with all the criticisms.
“You should contrast that with the stories you hear about Edinburgh schools, where 18 new schools have been delivered and head teachers are delighted. There have been 70-80 projects so far in Scotland, but such issues have only been raised about one or two.”
Elliot highlighted the example of East Lothian Schools. where the Innovate Consortium — which includes Noble & Company, Lloyds TSB and Forth Electrical Services — was left high and dry after its construction partner Ballast UK collapsed into administration in 2003.
He says that this proves the risk transfer does happen.
Elliot says: “That is an example of PFI working as it’s supposed to. It was the consortium’s responsibility to find a substitute contractor. For a contractor to go bust under PFI is a far better outcome for East Lothian than for a contractor to go bust under conventional procurement.”
The large number of PFI projects being introduced and the high cost of bidding, has meant fewer companies are tendering. In Glasgow there was just one bidder — a consortium led by Balfour Beatty and Canmore Partnerships — for the £190m Stobhill and Victoria hospitals project.
When the consortium was named as “preferred bidder” it sparked accusations the project could have broken European procurement rules.
Dr Matthew Dunnigan, a retired physician and a visiting research fellow at Glasgow University, says: “Effectively, it means the consortium has the health board over a barrel . . . Glasgow is getting a pig in a poke.” He was unimpressed by the creation of a “shadow bid”, put together by the Big Four accountants Ernst & Young.
There have been other major hiccups with PFI in Scotland. On June 17, Scottish ministers decided it would be cheaper to spend £25m buying out the Noble Group-led consortium that built the Inverness airport terminal than allowing them continue. In six years, the group is reported to have made £8.5m from an initial outlay of £5.5m.
But some observers say that this was an example of an early PFI scheme which was flawed, and that later schemes are fairer and better developed.
Another such issue was the Skye bridge bail-out, where the Scottish Executive bought the bridge back for £27m last year. A bridge that should have cost some £15m ended up costing the taxpayer £93.6m.
Jim Mather, the SNP’s enterprise and economy spokesman, says: “The Executive ought to be getting cold feet about the use of PFI, not only because of the Skye bridge and Inverness airport disasters, but also because of the adverse reports from Audit Scotland and the auditor general. The whole thing has obvious flaws in terms of the value for money it represents. More often than not it ends up being a closed tender.”
“PFI and PPP somehow seems to sedate this Executive. They may like to think they’re getting assets at a knockdown price, but what they are actually doing is mortgaging future generations to the hilt. If any deal seems to be too good to be true . . . it probably is.”
He refers to a recent Scottish Executive answer to his written question.
This revealed that the Executive, local authorities and other government bodies in Scotland will spend £3.5bn sustaining PFI/PPP schemes over the next 15 years. Mather says: “That was illuminating, not least because the liabilities stretching out to 2019/20 rise to one quarter of a billion pounds a year.”
Overall, Public Private Finance journal estimates that about 30 per cent of public capital investment in Scotland has been undertaken through PFI in most years since 1999. That compares to a figure of 10-15 per cent south of the border.
But Elliot dismisses Mather’s views as “political”: “Look what happens when you don’t have proper procurement procedures in place. You get hugely over-budget buildings like the Scottish Parliament. These big construction projects are very, very difficult. The NHS does not have the strength in depth to procure them itself and nor do local authorities in procuring schools.”
He also points out that new construction contractors are coming into the PFI market in Scotland. These include two from Germany — Hochtief and Bilfinger Berger — as well as Sweden’s Skanska and Denmark’s HBG.
Despite the problems and the views of some Westminster ministers, the enthusiasm of First Minister Jack McConnell and finance minister Tom McCabe for PFI/PPP remains undimmed.
Five Scottish ministers — McConnell and McCable, plus education minister Peter Peacock, health minister Andy Kerr and justice minister Cathy Jamieson — recently showed up at an infrastructure conference in the capital. “That was an unprecedented level of ministerial support for a conference and would never have occurred down south, “ says John Watt, a partner in project finance at accountants Grant Thornton.
In February, the Scottish Executive published a document, Building A Better Scotland, which included plans for a £3bn investment in transport infrastructure, £3bn to modernise 300 schools by 2009 and a £778m hospital building programme.
Watt doubts the Scottish Executive will go cold on PFI/PPP. Indeed, he detects a number of areas where PFI/PPP will be further developed in Scotland. These include NHS LIFT projects, where groups of doctors’ surgeries are bundled together into packages worth £15m to £25m each. “That’s already in its fourth wave in England but will come to Scotland before the end of the year.”
Grant Thornton’s Watt also highlights opportunities in both justice — prisons, courts etc — and transport. “It would help if the public sector was able to do more joined-up thinking, for example by developing schools that also had a community involvement angle, and also incorporated healthcare and libraries. That would make it easier to meet spending targets and obtain greater efficiencies.”
There are signs the Scottish Executive may be listening to such calls. Health minister Andy Kerr said at the end of June: “We are also giving NHS Boards the power to form joint venture companies with public and private sector partners to improve and create new community facilities and to support the provision of a wide range of primary and community care services.
Elliot is open-eyed about the fact the PFI landscape may be evolving. “PFI has a lot of life in it. But it will obviously develop, and that is not to be regretted.
“You must remember that it has never been the solution for every single capital procurement project. Prudential borrowing for local authorities is opening up opportunities both for the local authorities and the public sector.”
While the mood music at Westminster is changing, it seems clear PFI will be with us in Scotland for quite some time yet.
This article was published in the Sunday Herald on 10 June 2005