PFI for Dummies

Over the past few months, much has been said about PFI, and its influence on the Monklands closure. It has been said that the reason that Monklands has been picked for a downgrade, is because it is state run, whereas Hairmyres and Wishaw are PFI hospitals. But what is PFI and why might it lead to the closure of hospitals?

PFI – Private Finance Initiative

PFI stands for ‘Private Finance Initiative’. It is money borrowed from the private sector for capital builds and refurbishments in the public sector, usually for hospitals and schools. It is a fixed loan, paid back over a period of 20-30 years.

Why was PFI used?

It was seen as a way of controlling expenditure on public projects.
Central government was concerned that when building companies were doing public projects, they tended to be careless about running over budget and over the deadline for the project, because it was getting paid from the public purse. PFI meant that the building company had to be more careful, because the money was coming from banks and business men who would object more, if they were not getting value for money.

It was a way of removing large scale spends from the public balance sheet.
Because this money was being borrowed from the private sector, and being paid from local authority budgets, it meant that these costs did not appear as expenditure on central government accounts. This enabled whatever government was in, to look as though they were keeping a strict control on public spending.

Is PFI value for money? - Absolutely not!

It is far more expensive to borrow money from the private sector. These loans have to be paid back over 20-30 years at a prohibitive rate of interest. Hairmyres and Wishaw were built for £200million; we are having to pay back £1 billion over the next 25 years. That’s five times the original amount. If NHS Lanarkshire had been allowed to borrow public money and pay it back at the rate it is doing for the private loan (£40million per year), the debt would have been paid off by now.

The money has to be found from existing local budgets.
These loans are being paid from the existing budgets of local authorities and health boards. Because they are not being given extra money from central government to cope with these loans, they are having to find money either from cutting services or selling assets such as land. Recently, NHS Lanarkshire managed to reduce its £20 million deficit by selling the land that Law hospital used to stand on. And although NHS Lanarkshire deny it, the closure of Monklands A&E will mean that the board is paying for two A&Es, instead of three.

PFI is inflexible – you have to pay whether you are using a building or not.
Sometimes in a hospital, operating theatres or certain wards might not be in use. In a state run hospital that is not a problem; it just means the facilities are mothballed and they cost less money while they are idle. That is not the case with a PFI hospital. The hospital has to pay for the building and the facilities, whether they are being used to full capacity or not. Even if the building is knocked down, the loan still has to be paid to the end of its fixed period. That means that if a health board has to make savings, the only way it can do this, is by cutting back services in state owned hospitals; it is virtually impossible to do this in a PFI hospital.

PFI will eventually have to be paid for by central government, and it will cost far more than if they had used public money to begin with.
It is estimated by some sources that Britain as a country is paying out £4billion a year on PFI projects. Bearing in mind that the loans are for 20-30 years, we will end up paying £100 billion by the time the present loans are up. There is no way that local authorities can sustain this through their budgets; sooner or later this will have to be paid for by central government.

What can be done?

Several things could be done about this.

1. Don’t enter into any more PFI contracts. Use public money and cut out the middle man. Spending on hospitals and schools is not cheap, but it never has been. Sometimes you have to accept that to provide a good service, you have to spend money.
2. Re-negotiate the present contracts. Many local authorities ended up with prohibitive loans because they were not experienced in dealing with complex areas of contract law. The government has the power to re-negotiate, because the financing companies know that the local authorities will run out of money and the only chance of getting the loan redeemed will be if central government steps in. That means central government can negotiate on its terms.
3. Do it now. To service these debts, day hospitals, nursing homes and a whole host of services are being cut to make savings. We must pressure the government to act now, not after these services are closed.