Comment / A capital plan?

There may have been a kerfuffle about PFI recently, but capital from whatever source will play an important role in transformation

It has been some 12 years since the British medical journal labelled the PFI as ‘perfidious financial idiocy’. But some shows are clearly built to run and run. All those years ago, the doctors’ journal talked about ‘smoke and mirrors’. Some might suggest we have seen a little of this again in recent weeks.

The whole subject of the private finance initiative – if we are going to talk about it to its face, we should use its correct name – jumped back onto the front pages in late September. Reports (in The Telegraph) suggested health secretary Andrew Lansley had been contacted by 22 hospital trusts concerned about the cost of their unitary charges. ‘The truth is that some hospitals have been landed with PFI deals they simply cannot afford,’ he was reported as saying.

There was an understandable reaction from managers in some of the implicated trusts. The gist of their response was that PFI debt repayments alone are not to blame for the financial pressures that many trusts are now experiencing.  Most finance professionals will know that while the fixed nature of PFI payments is an issue, the fundamental concern is around achievement of the £20bn savings target.

Whatever people’s views about the pros and cons of PFI, within the finance community we would recognise that there has always been a simplistic understanding of the initiative. For example, how often do we hear lifetime PFI costs including facilities management compared with the upfront capital cost if bought with public funds?

But what has been glossed over in the recent debate is that not long ago, with the absence of publicly available capital, PFI was the only game in town. A significant amount of modernisation over the past decade and the provision of new state-of -the-art hospitals may not have been possible without the use of PFI. 

Undoubtedly there are costs associated with the benefits of these new facilities, but the business cases for these schemes were supported by local health communities and now need to be delivered in the context of emerging service reconfiguration plans.

We understand that Monitor, in preparation for its new broader role, is looking at the current provider remuneration system. Perhaps in the future we may see some adjustment to tariff – a form of market forces factor approach – to take account of unavoidable costs of existing capital estate.  (Although how this fits in with ensuring a level playing field for new entrants needing to raise their own finance for new facilities is unclear).

However, capital will inevitably play a big role in the transformation of services we need to see. And ensuring there is sufficient supply of funding in this area will be crucial to achieving the QIPP agenda.

Some foundation trusts may be able to satisfy loan criteria and borrow. But will this be in the right areas and at sufficient levels? Recent guidance from the Department of Health on the future ownership of current PCT estate opens up the possibility of acquiring community properties, but with the Department retaining the right to reacquire these properties or take 50% of any gain in value. 

Unless there is a rethink on how capital can be made available to support service transformation, there could be serious constraints placed on much needed radical plans. 

Forward-thinking organisations may look to address these constraints by entering into partnerships with the private sector.  But hang on. Private sector financing of health facilities? Doesn’t that bring us back to where we started?