PFI – Getting Value for the Taxpayer
“The NHS is the closest thing the English people have to religion”
were the famous words quoted by Nigel Lawson in his memoirs published in 1992 . Today’s political climate demonstrates that this is as relevant today as it has been since the inception of the NHS. Throughout Boris Johnson’s 2019 election campaign his focus was on Brexit and the NHS, and who can forget the infamous £350m a week NHS pledge during the Referendum campaign. The continued existence of the NHS, and the increases in funding it receives, demonstrates the importance we all attach to support those in most need. But whilst we all care passionately about our health service, the NHS itself and its estate needs intensive care.
The last comprehensive strategic review of the NHS estate, the 1962 Enoch Powell Hospital Plan for England and Wales, led to the District General Hospital system we have today. Since then little attention has been paid to NHS infrastructure and continuing underfunding of capital has resulted in a deteriorating estate, with backlog maintenance estimated at £6.5bn. Nearly a fifth of the NHS estate predates the NHS itself.
In March 2017, the UK Government published my report
‘Why the Estate Matters for Patients’ , which concluded that without investment the NHS’s Five Year Forward View (subsequently revised by the Long Term Plan) cannot be delivered, much of the NHS estate will continue to be unfit for purpose and will experience further deterioration. The review recommended an immediate additional £10bn funding into the NHS’s infrastructure and facilities, which comprise hundreds of buildings that have a substantial impact on people’s lives. This funding could be met in roughly three equal parts, Treasury investment, selling unused or underutilised NHS estate and private sector investment.
To be fair to the Government, it has committed an additional £3.9bn since my report, but this is a proverbial drop in the ocean when compared to future needs. Capital spending on NHS hospitals has averaged £3.3 billion per year over the last decade placing it the 5th lowest of the 34 OECD countries. This historic under-investment and the transfer of capital to support day to day revenue pressures, has meant that the Department of Health has been forced to divert its scarce capital towards urgent backlog maintenance. At the time of my report we estimated this to be £5bn, but recently it has been officially updated to £6.5bn and will continue to rise unless urgent action is taken. All of this means reduced funds for major redevelopment in new facilities.
The second source of funding, selling off spare land, is notoriously difficult to achieve; consolidating NHS facilities, closing under-utilised hospitals and then selling the vacated sites can be a red rag to local community groups and politicians. At the outset I was set the target of identifying £2bn of land sales; my conclusion was that this could be overachieved to the tune of perhaps £5.7bn if some potentially controversial reconfiguration decisions were made. A relatively simple example of this was the relocation of the clinically isolated Brompton Hospital in Chelsea to St Thomas’s Hospital, thereby aligning it with the comprehensive services on that site. The cost of this move would be a fraction of the value of the land released, it would eliminate backlog maintenance and achieve improved clinical adjacencies. Other examples are more complex, requiring collaboration between multiple partners with various vested interests. These barriers put further weight on the public purse to deliver the essential investment.
Not only do we need to maintain and renew the current estate, but many new hospitals are needed to keep pace with demographic growth. Without substantial additional funding such an expansion in capacity will be impossible. Although the major focus of my Review was on new and replacement hospitals, there are numerous other facilities in urgent need of attention particularly in priority areas of mental health, primary/community care and support services such as pathology laboratories.
Private sector investment in the NHS
has been one of the UK’s political controversies since the outset. Successive governments seized the opportunity to access funds through “Private Finance Initiatives” (“PFI” and “PF2”) to keep expenditure off its own balance sheet. The drawbacks of the PFI model are well documented: private sector investment is often bundled with inflexible maintenance contracts, securitised within offshore structures and littered with punitive variation clauses. Stapled to expensive private equity, demanding a high return with little appetite for risk, this has left hospitals incapable of adapting and modernising.
Whilst blame is often laid at the door of Government for not supporting the NHS, there is another fundamental dynamic at play here: the majority of long term capital in our society does not reside within public sector, but sits with financial institutions in the banking and pension sector.
Analysis commissioned by a major pension fund demonstrated that one NHS Trust was paying over £100 million more in charges over its contract period, compared with a direct investment route. The number of new NHS PFI schemes in the last decade is no more than those commissioned in the single year of 2007. In the face of widespread disquiet within government, the NHS and financial institutions, the PFI model was abandoned by the Treasury in the 2018 Autumn Statement.
Whilst leaving this outdated initiative behind was a positive move, there is now a gap to fill in order to properly support our NHS. Institutions, with long term varied capital streams and risk profiles, need to step in, working in partnership with the public sector to create innovative and pioneering structures that can be flexible and adapt to the needs of local communities. For example, pension fund has deployed over £1bn in recent times to provide new office buildings for Civil Servants across the country. Similar structures could be considered for the NHS, funding a wave of improved facilities and infrastructure.
So, what’s the link between my report, the demise of PFI and the development of Just Contract Management (JCM)?
Subsequent to the Government’s official adoption of my report it decided to discontinue the PFI programme with Philip Hammond, the then Chancellor of the Exchequer, stating that the NHS must get better value from its historic investment in PFI. This where Just Contract Management (JCM) comes into the picture.
At the time I was finishing my 17 year tenure as CEO at University College London Hospitals (UCLH), having inherited one of the largest PFI project in the NHS, along with other externally contracted services such as transport, IT and private practice. One day a middle manager came into my office to say that we had just missed a contract deadline, such that it was automatically renewed thereby missing the opportunity to negotiate better terms. In response to my request for a copy of the contract I was told that it couldn’t be found! I called in Brian Clark, a commercial lawyer (and now my partner in JCM) to investigate our exposure in other contracts – his response confirmed my worst suspicions about our poor contract management. We addressed the issue through a project that analysed the people, process and the application of technology to claim past overpayments and ensure that we get what we pay for in the future. This process is explained elsewhere on this website.
When I left UCLH, Brian and I set up JCM to apply the same principles to other NHS Trusts and the public sector generally. Having now been now involved in several such projects we have found the same problems with the same opportunities to deliver multi million pound savings at a 30:1 return on investment. We are now working with the DHSC and NHSI to deliver Philip Hammonds commitment and ensure that patients get what they pay for through their taxes.
Sir Robert Naylor.
Chairman JCM.