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18 October 1999

How Britain mortgaged the future

Special Report: The Private Finance Initiative - The conjuring trick that allows government

By Nick Cohen

To the best of my knowledge, Quite Ugly One Morning by Christopher Brookmyre is the only thriller in the history of English letters in which the villain is a National Health Service administrator. Perhaps sensing that readers might find this blameless occupation an unlikely career choice for a rapacious mass murderer, Brookmyre hastens to give us an internal monologue. His psycho, a businessman who is made chief executive of an Edinburgh hospital trust by the Tories, reflects on the exciting opportunities opening in the new “public” sector:

The National Health Service was an aberration . . . It was just one huge, amorphous, unanswerable entity, running its own ship, its spending dictated almost entirely by patients’ healthcare needs. No familiar faces at the top with the power to award hefty contracts; indeed precious little in the way of external contracts at all. No six-figure executive posts with company Beamie . . . It just swallowed up public money and circulated it within itself until it needed more.

Nightmare.

Aberration.

The basic fact of the matter was that if public spending could not be avoided, it should at least be spent in the private sector. But then came the dawn of the Trusts and the picture got suddenly and dramatically brighter.

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When the prescient Brookmyre published his book in 1996, the mechanism for stripping the assets of the health service was in place, but the division of the loot had barely begun and looked as if it was about to be stopped in its tracks. That year Ursula Pearce, chairwoman of the South Birmingham Community Health Council, went to hear Harriet Harman and a brace of new Labour speakers bravely oppose the Conservatives’ internal NHS market as privatisation by stealth. Harman promised action as soon as Labour reached office. “Thank God Major’s on his way out, I thought,” Pearce told me.

To help win the election, Labour deployed a new stereotype. Worcester Woman joined Essex Man, New Lad and It Girl; she had a hard head but a soft heart. She didn’t want to pay tax for the sake of it but cared deeply about the health and education of her children. Her concern was understandable. Worcester Hospital was a dilapidated shambles sprawling over three sites. One building was erected in the 18th century. A second was a prefab left from the war, and the third was a half-completed modern block. For 30 years the county’s citizens had been trying and failing to get ministers to sort out the dismal mess.

Worcester had become the Basildon of the 1997 campaign – if Tony Blair won it, he took the country. He went there and announced the greatest hospital building programme in the history of the NHS: an end to the scandal of under-investment.

In 1962, a national plan promised 224 new hospitals. Nearly 40 years on, only a third have been delivered. At last a long-delayed dawn was about to break. Labour’s Private Finance Initiative (PFI) is bringing 30 new hospitals from Norfolk to Worcester, from Durham to Dartford. And not only hospitals.

Britain is committed to £84 billion-worth of spending through PFI. It has become the only way of funding “public” works. It’s the mechanism behind the rebuilding of GCHQ and the renovation of your local school, now perhaps cloaked in scaffolding. But PFI has had notorious disasters: the computer collapses at the Passport Office and Department for Social Security, for example. It is PFI that will allow Railtrack to get its hands on a large slice of the London Underground.

The initiative has been Britain’s gift to Europe and the world, like privatisation before it. The International Monetary Fund and World Bank impose it on developing countries. Our children will remember this government for PFI. And many believe they will curse its cowardice and folly. The conjuring trick that enables the government to build hospitals and schools without increasing public sector borrowing, they argue, will cost them dearly.

The united front between the political and business classes has obscured the consequences of what the British Medical Association calls “perfidious financial idiocy”. It is “a smoke and mirrors policy that may destroy the NHS,” the association’s journal has said. It brings “generous scope for corruption” and the “shrinking of the NHS to a rump service to the poor”.

Opposition to PFI can be lonely. There is no serious national debate; criticism just breaks out locally when citizens realise what is being planned. A privately financed hospital may be all but a done deal before people learn that it will bring worse treatment at a staggering cost.

In their different ways, Pearce and Worcester Woman have been involved in the small but fierce bushfires. As a result, Pearce has been isolated and vilified by new Labour’s Brummie establishment, but the supposedly banal inhabitants of Worcestershire, the most Middle English of counties, grew tired of being patronised by metropolitan message masseurs and stunned the NHS by staging a revolt.

The country’s leading specialists on NHS funding warn that we are heading for a downsized third world health service. They will drop everything to advise any local group opposing PFI. Allyson Pollock and Declan Gaffney at University College London, Jean Shaoul from Manchester University and David Price from Northumbria University have all written scrupulous analyses driven by an urgency unusual among academics. They argue that PFI is already a failure on any terms, including the government’s.

The first point to note about a PFI deal is the exorbitant price. In Edinburgh, the new infirmary would have cost £180 million if the Scottish Office had paid for it out of direct taxation or government borrowing. Under PFI, a private consortium will design, own and service the hospital and then rent its property to the public for £30 million a year for 30 years. So one medium-sized hospital will transfer £900 million of public money to the private sector. Note that the annual £30 million charge will rise each year in line with inflation. The burden on the taxpayers of 2029 will be the same in real terms as it is today.

However bad a bargain Labour has struck – in Scotland the government would have saved £2 billion if it had paid for the PFI programme from the public purse – there will be nothing anyone can do. The 30- to 60-year contacts are unbreakable.

Labour’s acquiescence to such conditions is a signature policy of the Third Way. Supposedly left-of-centre parties are not prepared to tax the rich or the rest of us but cannot avoid expenditure. PFI has the advantage of delaying a reckoning until they are out of office. The politicians who talk so loudly about responsibility are rushing to dump their tax burdens on to their children.

Ministers do not say this and maybe do not think it. They have two justifications for the battery of prudence. The first is that “discounted cash-flow” analysis proves that private is best. The best way to understand this piece of Treasury jargon is to imagine a reverse alchemy that turns gold into base metal. The sums going to developers seem insane. But then the wizards in the dank cellars of Threadneedle Street chant the spells of cash-flow analysis. The cauldron emits a shuddering belch and the wealth of the nation is transformed into loose change.

The analysis considers the advantages or disadvantages of buying a new hospital (or kitchen, for that matter) upfront from the point of view of a private investor. On the one hand you don’t pay interest. On the other, you tie up money in a depreciating asset that could be working for you on the stock exchange or money markets. Cash-flow analysis guesses how much will be lost by paying for a hospital outright. The higher the Treasury sets this loss rate, the more attractive the larcenous HP demands of the contractors look. It is no surprise to learn that the estimated losses are very high indeed. The system, Pollock and her colleagues argue, is rigged to make private sector demands appear like a good deal.

Career politicians rarely have more than the haziest idea of how businesses work. Their ignorance leads them to give contractors huge compensation for shouldering risk. On average, the costs of NHS building projects overrun by about 10 per cent. But in PFI deals tens of millions of pounds are given to building companies on the assumption that in all likelihood costs will overrun by as much 34 per cent. Firms are being compensated for risks they’ll never face. The attitude of construction companies, banks and pension funds gives the game away. If PFI projects were really precarious, they would not be falling over each other to get to the trough.

Earlier this month Carillion, the building business that used to be part of Tarmac, said there was no need for it to engage in adventurous capitalism when PFI contracts provided a secure and stable income.

Ursula Pearce worried about the waste of money, but what infuriated her was the realisation that the public would be paying through the nose for a downsized service. To meet the demands of the private sector, health trusts are slashing beds, doctors and community care, and knocking down city centre hospitals to give prime land to developers. The new hospital in Hereford was meant to have 351 beds until the authority found it could hope to pay its bills only if it cut the number to 250. In Norfolk, officials said they needed 1,600 beds; now they will have to make do with 1,000. The pattern is repeated in every PFI project.

On average, the cost of paying business to build and service a new hospital is a 30 per cent reduction in beds (when health ministers are proclaiming the need to reopen wards). Staff cuts and unsustainable pressure on the remaining doctors and nurses follow. The government has tacitly admitted that the system does not work by diverting resources from the rest of the NHS to trusts caught in the PFI trap. The emergency transfers were euphemistically called “the smoothing mechanism”.

In south Birmingham, the hospital authorities proposed closing the Selly Oak and Queen Elizabeth hospitals – even though they had spent £60 million on updating them – and giving the choice land on which they stood to the developers who would build a new hospital on a remote and contaminated site. In 1980, south Birmingham had five hospitals built up by decades of taxation and public charity. Soon it would have just one, forced to make continuous charitable donations to business for decades. Pearce went into action. “For every £200 million spent on PFI about 1,000 clinicians’ jobs go,” she said. “I thought it was my job to make a noise.”

She was just one woman up against both major parties, big business and the unthinking commercialism of our times. But she did what she could and the Community Health Council put out a little leaflet saying that the need to make profit was being put before patients. As chairwoman of the Community Health Council, it was her duty to represent the sick. But the city’s Labour Party did not see it that way. Steve McCabe, the local MP, said her behaviour was “outrageous” and illegal and demanded that Frank Dobson and the courts intervene.

One of the many handicaps opponents of PFI face is that accountability in the NHS is pitiful. Community health councils can be stuffed by health authorities. The fix is on in Birmingham and, after denunciations from McCabe and health authority executives, Pearce expects that she will soon be fired for the unpardonable crime of opposing the privatisation of NHS hospitals by a Labour government.

Her predicament illustrates a national crisis of representation. To whom can people turn when their public services are ransacked? The Tories? The courts? In the past they would have looked to Labour, but this is no longer an option. However you vote, conservatism remains undisturbed.

Worcester has been forced to confront the democratic deficit. The PFI hospital Blair promised is bringing the usual mixture of misery and extortion. The number of beds in Worcester will fall from 540 to 380. The cost of the downsized hospital has risen from £46 million to £97 million. To meet the 30 years of fees to the private developers the health authority is resorting to a characteristic tactic. Kidderminster hospital will be reduced to a glorified outpatients department so the developers of the Worcester site can be paid.

John Ball, a retired doctor, organised a protest. Twelve thousand demonstrators poured on to the streets of Kidderminster and heard the Mayor of Stourport display a far better grasp of the consequences of PFI than most politicians. It would make better sense “to borrow on a Visa card”, he said. Dobson and the health authority ignored them. No political party would defend the NHS. So Kidderminster formed its own.

In last year’s local election, Health Concern won 42 per cent of the vote in Wyre Forest – the parliamentary district that covers northern Worcestershire – and Labour lost control of the council. Now Ball and his friends are talking of running a candidate at the general election. The citizens’ movement could well split the vote and let the Tory in. No one cares. Worcester has learnt the hard way that it does not matter whether new Labour or old Conservatives are in power.

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