Why Should You Know About Private Finance Initiatives?
Fresh news-reports coming out from the National Health Service (NHS) are frightening! For when the fiscal deficit of the trusts of a government agency fall to a faint-inducing £571 million, there must something fishy; something very fishy indeed! Key to the current economic woes of the NHS is a policy being followed known as “Private Finance Initiatives” or PFIs. So, what are PFIs? And should the use of these PFIs be halted once-and-for-all?
What Are Private Finance Initiatives?
A PFI is when private investors provide the immediate capital required to commence a public sector project. Private investors handle the up-front costs of construction of the infrastructure and then lease out the infrastructure built for the use of the public; the public sector then makes annual payments to the private investors annually with interest over a period usually exceeding 30 years. Private investors provide the capital required for the provision of any services in that infrastructure for the duration of the repayments; the government pays for these services on a “no service, no fee” performance basis. Finally, if the project gets cancelled at any point of the construction, the government will be compelled to pay private investors for all costs associated with the project and take ownership of the project in a process called “termination”.
How Does The National Health Service Come Into This?
Introduced by John Major’s Conservative Government in 1992, the NHS has increasingly relied upon investments from private sources to fund the development of hospitals, clinics and warns. Exacerbated in the Tony Blair-era, the NHS will have made £55 billion in payments by the time the current rounds of payments end in 2050; that is, if more investments from private sectors are no longer taken: What is the possibility of that happening? Very bleak!
As the graphs above show, when ignoring the period from 2020-21 due to the exceptional COVID-19 circumstances, the government expenditure on health usually hovers around the 7% mark and annual spending has remained mostly constant from 2008 onwards. Without additional funding from the government, the NHS will have to continue to rely on PFIs to develop its infrastructure.
What Are the Advantages of PFIs for the NHS?
Proponents for the utilization of PFIs in the development of new infrastructure by the NHS list out the following points:
1) PFIs create an avenue for the transfer of knowledge between the private and the public sector: By fostering long-term (often more than 30 years) relationships between the private and the public sectors, the two can share knowledge, innovate, and continuously improve the provision of their services. The expertise gained by NHS overseers of the private investors’ working practices can then be disseminated amongst the entire public sector leading to increased efficiency.
2) Lower Cost of Projects- The UK National Audit Office, in 2003, found out that compared with government-funded projects of which 27% finished under the budget, 78% of PFI-financed projects finished under budget. Furthermore, since the government no longer must pay a large lump sum right at the start of the construction of new health-care infrastructure, it no longer requires borrowing money from banks. Hence, more cash available for funding other projects.
3) Better Management Skills of Private Sector- A research study conducted by Carrillo in 2008 found that private financiers have greater experience in the management of businesses in various fields. As a result, the private sector has a better role to offer project management skills, innovative design, and risk management.
What are the Disadvantages of PFIs to the NHS?
Despite the above advantages, detractors of the scheme bring to light many negative aspects and perceived failings of PFIs on the NHS and by extension onto the public sector. Some of the concerns they have highlighted are as follows:
1) Increased Costs for the NHS: While this may seem to counter the point made above that PFIs lead to lower costs of projects, it is also true that banks consider lending money to the government as a safer option than lending money to private investors. As a result, banks charge higher interest rates (7.2-7.4%) to private investors on the same amount of money if it than if it had been loaned out to the government itself (3.1-3.4%). When the NHS then repays this money to private investors, they are compelled to pay higher charges to offset this increased interest rate. The point to consider here is as follows: Does the fact that the government pays this amount over a longer period outweigh the cons of paying far more money for the same project?
2) Time-Consuming Initial Start-up: The PFI process takes an inordinate amount of time during the negotiation stage and contract creation stage. A report by Spackman in 2002 and by Li Bing in 2005 found that PFI projects were more complex than traditional contracts made between the private and public sector due to the gigantic amounts of money involved. When considering the fact many companies do not get positive outcomes from the project until they are at least halfway into it and patients start using the facilities, many private investors find it risky to partake in such a massive undertaking. This reduces the supply of private investors available to the NHS and hence drives up the prices demanded by the remaining. This has manifested itself in the figures: According to Nuffield Trust, total PFI repayments by the NHS today are expected to eventually add up to a total of £82 billion. The amounts are greatly exacerbated by the limited number of investors willing to undertake such massive risks. Should the NHS continue engaging in such an oligopolistic market?
Total yearly cost of repayments to private investors the NHS is projected to pay and that it has already paid. The amounts are greatly exacerbated by the limited number of investors willing to undertake such massive risks.
3) Rapid Changes in Financial Markets- The negotiations between the NHS and private investors can often take years to plan. Financial terms on the contract are often agreed upon very early into the contract; By the time the negotiations have been completed, financial markets may have changed (e.g., Great Recession of 2008), which may make the terms on the contract favourable or unfavourable to the NHS. While the NHS has attempted to solve this problem of the volatility of financial markets by implementing a revised method of PFIs called “PF2s”wherein the economic conditions of the time can be taken into considerations to make changes to the contract in exceptional circumstances, a lot still needs to be changed to combat this menace. Do the benefits of PFIs outweigh the negative impact of volatile financial markets making the contract immensely unfavourable to the NHS?
Conclusion and Evaluation-
Having read about all the benefits and criticisms of PFI schemes to the NHS, the onus is now on you. The end of each of the sections on disadvantages includes a question: Consider the question and answer the question posed to you in the title of this essay- Should the NHS continue using PFI schemes for building new hospitals?
Send your responses to mmamnoon04@ses-students.org.
I look forward to hearing what you think about this issue!
Bibliography:
5) https://www.statista.com/statistics/472984/public-health-spending-share-of-gdp-united-kingdom-uk/
10) Gaffney, D et al. “The private finance initiative: PFI in the NHS--is there an economic case?.” BMJ (Clinical research ed.) vol. 319,7202 (1999): 116-9. doi:10.1136/bmj.319.7202.116
Comentarios