Doubts and anxieties about Savernake Hospital’s private funding initiative (PFI) have been raised by Devizes MP Claire Perry and local campaigners – both about the size of its burden on the area’s health services and its future amidst the wholesale reconfiguration of the NHS. And some local people have expressed worries about what might become of the hospital itself.
In addition, the whole value of PFIs in building new infrastructure has been called into question at Westminster – in Parliament and within the Treasury. And this just as the Chancellor of the Exchequer announces that he wants to get more private funding into building to help fire-up the stagnating economy.
Semperian’s annual bill for the Savernake Hospital PFI (known as the ‘unitary charge’) is £938,000 for the financial year 2011-2012 – paid by NHS Wiltshire, our Primary Care Trust (PCT.) This cost is partially offset by rental payments from the other health authorities that provide services at Savernake.
And for the Great Western Hospital the unitary charge this year is £18.7 million – paid by Great Western Hospitals NHS Foundation Trust .
Alan Birch agreed to meet Marlborough News Online at the company’s regional offices in Bath. The group own and run over a hundred PFI projects. They are secondary investors in the PFI market. They do not start projects and build hospitals, schools, army training facilities, roads and so on, they do buy up projects that have been successfully completed and then run them.
And the running of them is where things get complicated. Aside from the capital investment and consequent interest payments, the contracts include two types of facility management: hard (which includes maintenance, replacement of equipment and of plant like boilers or switchboards) and soft (which includes facilities involving staff like catering and security.) Alan Birch says that the average proportion for Semperian PFIs that is spent on hard and soft facilities management accounts for between forty and forty-five per cent of the unitary charge. Many of these services will be contracted out and, to maintain value for money, are put out to tender every three or five years and the unitary charge is then adjusted to ensure the taxpayer only pays the market rate for these services.
Turning to the ‘hard services’, during school holidays, Alan Birch’s project managers can be organising £70 million of maintenance work at their PFI schools – making sure they’re finished so the schools can re-open. If they can’t re-open Semperian won’t get paid its unitary charge.
Alan Birch started his career as an apprentice plumber with British Rail at Edge Hill in Liverpool. By the time he was twenty-three he had become a manager and was given the job of preparing the Liverpool area’s maintenance organisation for privatisation.
He has been involved in PFI from the outset, negotiated the very first PFI projects for education and worked his way through every level of management until he reached his current position. Now aged 41, whilst his family home remains in Wigan, he works from London during the week.
He certainly knows a great deal about making economies and running a tight and efficient ship. Along the way he has, he says quite openly, worked very hard and been rewarded very well. He even joked he could retire and live modestly in Wigan: “But I choose to work because I like what I do.”
He likes working in the social infrastructure sector, and he likes being able to make a good return for his investors, almost all of which are public sector pension funds or UK corporates that the government has a material stake in. That return is generally eight to nine per cent. He likes seeing the returns generated by Semperian fed back into the public sector via pension funds – forming a virtuous circle.
So he’s a little disconcerted that PFIs have suddenly become a political football. He wonders whether if they had been named PPPs – public private partnerships – rather than PFIs, the current political squall would have arisen. Especially as the public sector is unable to raise the money and politicians are saying how much our infrastructure needs updating.
The bulk of these savings will come from soft facilities management on which Alan Birch says “We don’t make a single penny and never will, all these savings are passed directly to the owners of the buildings.”
He explains that as soft services rely on people, the savings will come from lower wages now that nationally pay increases have fallen so far behind inflation. The November figures showed the pay of British workers up just 0.4 per cent on November 2010 while inflation is above five per cent.
There are other ways to save small parts of the unitary charges. For example Semperian now pays Savernake’s gas and electricity bills. This is a simple way to save money as Semperian with all its projects can bulk buy energy at far greater discounts than a small group of primary care trusts. At Savernake this will save between £15,000 and £20,000 a year.
PFIs were born in November 1992 when Norman Lamont announced “ways to increase the scope for private financing of capital projects.” And the Conservatives’ 1997 election manifesto promised to use PFIs “to unleash a new flow of investment funds into the modernisation of the NHS.”
Labour won that election and made PFIs their own. Records show that 101 of the 135 new NHS hospitals built between 1997 and 2009 were funded using PFI. The 2010 coalition agreement confirmed its future use of PFIs. And as at March 2011 sixty-one new PFI projects were being procured – with a total investment value of £7 billion.
Alan Birch does admit that at the beginning a few companies succeeded in making some big short term gains on projects mainly because there was a flood of money into the PFI market. However, since the credit crisis private sector borrowing costs have tripled and sometimes public bodies can get funds more cheaply than PFI projects allow – especially now with interest rates at rock bottom levels.
An example is Semperian’s sale of two of its PFI projects to Transport for London (TfL) which is a government body with a triple-A rating and is unique in that it can raise its own external funds. The two PFI projects are extensions to the Docklands Light Railway – the Woolwich and Arsenal links both run by Semperian companies.
According to TfL this will save some £250 million over the length of the contract. TfL can make this work because it does, of course, have its own maintenance teams ready to go.
Alan explained: “On these two PFI projects Semperian could not match the cost of borrowing TfL could find, so the only pragmatic thing to do was to sell them the companies and let them realise the savings. But this is an exception. The fact is public sector funding is not normally available and so private finance is required.”
Private finance is more expensive than public finance, but if the latter is not available because a government won’t allow more borrowing, then it is not a question of comparison, more a realisation of the true costs of renewing our social infrastructure.
One of the FAQs about PFIs is why the unitary charges for NHS projects rise each year by inflation (RPI.) This money is used to repay the capital toward the end of the contract. It means that unitary charges start lower and are paid for by matching RPI increases in funding to the PCT or hospital trust.
However, during the current period of austerity and the reduction in NHS funding, the inflation linked unitary charge is being seen as a burden, but the inflation element is needed to repay capital raised to fund the building of the hospital.
Stirring the political storm swirling around PFIs, conservative MPs have implied that the last government simply ‘threw money’ at projects. But a look at the Treasury’s role in the development of PFIs shows that contracts have evolved and become tighter since the days of the Major government. The current standard contract – ‘Standardisation of PFI Contracts Version 4’ (“SoPC4” for those who need to know) – was published in March 2007 and is still in use.
This would seem to be a perfect fit as Great Western Hospitals NHS Foundation Trust took over Wiltshire’s community health staff – and community hospitals – from the PCT in June this year.
Alan Birch has comfort for those who fear Savernake Hospital might simply disappear when Wiltshire’s primary care trust disappears. The contract has a clause which means that “upon the Trust ceasing to exist”, the contract is passed automatically to its “successor” organisation which may include “any person to whom the Secretary of State [for Health] in exercising his statutory powers…transfers the property, rights and obligations of the Trust under this Agreement”.
- Semperian PPP Investment Partners is a £1.3 billion company. It is one quarter owned by the Transport for London pension fund. Its other shareholders are similar institutions.
- The money to rebuild and extend Savernake was lent at 6.98 per cent a year.
- PFI keeps debt off the government’s books. The national debt would increase by at least £35 billion if all PFI liabilities were included.
- By May 1997, seventy PFI schemes were in the NHS pipeline.
- In the NHS at present there are £2.9 billion of PFI projects under construction and another £1.4 billion worth in the preparation or procurement stage.
- The Treasury estimates that when all Department of Health PFI projects are taken into account the annual unitary charges will add up to over £1.5 billion for 2011-2012.