The BBC's claims that PFI hospitals worth just £11bn will end up costing the taxpayer £65bn have led to a public outcry.
But the criticism is far too simplistic. The actual cost of building the hospitals is likely to be nearer the £11bn figure.
For this, the private contractors have produced the new buildings, plus borne the financial brunt of any cost overruns or delays. The example provided by the publicly funded Scottish Parliament building – which was almost 10 times over budget – demonstrates the benefits of allowing private contractors to take on these risks.
Furthermore, the bare figures do not take into account the annual repayments to contractors, which include the buildings' maintenance and in some cases services such as catering.
Rather than simply funding a new building, the public sector client is also paying to ensure the asset is maintained, so its value at the end of the 25 or 30-year contract is almost the same as when it was newly built. Far from being a lead weight during the age of austerity, PFIs may offer some refuge.
Maintenance budgets are almost always the first – and easiest – to cut in times of trouble. But PFI spending is ring-fenced by the contract.
In a decade, PFI hospitals, schools and other buildings will almost certainly be in better shape than any other public building of the same age. This is almost always overlooked when new headlines are published about the apparently exorbitant cost of PFI.
Worryingly, though, the new government seems happy to jump on the bandwagon. Responding to the PFI hospitals furore, a spokesperson for health secretary Andrew Lansley suggested his predecessors should have considered other funding methods.
In reality, it's doubtful the health service could have created over 100 new hospitals without cutting frontline services had it not relied on private finance.
Alongside this failure to grasp the economic realities, there appears to be a distinct lack of understanding around how PFI contracts work. In response to the attacks on hospital PFI costs, Conservative MP Jesse Norman claimed in a Financial Times article that the public sector should be able to reduce its PFI repayments now it has less money.
But why should a company, which has entered into a contract in good faith, be willing to reduce its remuneration for no reduction in the quality or amount of work required? It would be tricky to justify under contract law, and certainly make private companies think twice before entering into another government contract.
Absorb reduced payments
Norman's claim also supposes contractors are able to absorb reduced payments – which is far from true. Some of the biggest PFI players, including Interserve and Morgan Sindall, have revealed large falls in pre-tax profits, while advisories Tribal and Gleeds are both planning redundancies due to less work.
Even where contractors have been flexible in the past, such as revising contracts so that service levels are reduced, practitioners agree this has only a small impact in the overall cost.
With little new work coming from government, companies are unlikely to make such changes lightly.
There seems to be a growing perception that private funding equates to profiteering. But the experience of Hartlepool hospital suggests otherwise. Plans for a new publicly funded hospital were scrapped by the coalition government as unaffordable.
Private finance now looks set to come to its rescue, and bosses are confident it will be considered better value by the Department of Health.
PFI is not perfect, but it does offer some real benefits to the public sector and will ensure maintenance, catering and some other service levels remain a top priority despite the financial squeeze.
Those in government need to recognise this before joining the chorus of disapproval, which rarely explores behind the large figures that make good headlines.
Paul Jarvis is editor of Partnerships Bulletin
From Bubb's Blog
From Whitehall Watch
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