Support 100 years of independent journalism.

  1. Spotlight
17 January 2020updated 25 Jul 2021 3:18pm

The government has wasted vast sums on unbuilt hospitals – but PFI is a hard habit to break

A new report by the National Audit Office finds that Liverpool will wait another five years to use its new hospital. But with huge spending pledges on the NHS, will PFI rear its head again?

By Jonny Ball

At last year’s Conservative Party conference, Boris Johnson committed to building “40 new hospitals” in England over the next ten years. The Institute for Fiscal Studies estimated that the cost of such a scheme would be £24bn. It later transpired that nowhere near that sum had been earmarked for new capital spending in the NHS – £24bn would mean almost £6bn more than if the elusive £350m-a-week saving from the UK’s EU subscriptions had actually gone into the health service for a whole year. In fact, as it turned out, six hospitals would receive an upgrade, at a cost of £2.7bn. A further 34 hospitals would receive “seed funding” to “develop their business cases”.

“In North Manchester General Hospital… the staff are doing an amazing job but they’re doing it in buildings that were built in 1870,” Johnson told the BBC. He had identified a serious problem: The Health Foundation has reported that the Department for Health and Social Care’s spending on capital projects – that’s repairs, new equipment, buildings, facilities – has declined by seven per cent in real terms since Johnson’s party came to power in 2010.

But this Prime Minister is by no means the first to struggle to find a way to fund his NHS pledges. And as two decades of Private Finance Initiatives (PFI) and Public Private Partnerships (PPP) show, these promises can turn sour.

Two major hospitals currently stand empty after the collapse of Carillion’s PFI hospital contracts in 2018. A National Audit Office report, released today, finds that the 646-bed Royal Liverpool, originally due to open in June 2017, is now forecast to be completed more than 5 years late. The city’s healthcare provision is suffering as a result.

The old Royal Hospital, a grey 1970s brutalist block described by Andy Burnham as “a little piece of Eastern Europe on Merseyside”, is in a state of steady disintegration and disrepair. Opposite, what looks frustratingly like a state-of-the-art new facility stands empty, what Frank Field called a “creaking monument to greed”.

Sign up for The New Statesman’s newsletters Tick the boxes of the newsletters you would like to receive. Quick and essential guide to domestic and global politics from the New Statesman's politics team. The New Statesman’s global affairs newsletter, every Monday and Friday. The best of the New Statesman, delivered to your inbox every weekday morning. The New Statesman’s weekly environment email on the politics, business and culture of the climate and nature crises - in your inbox every Thursday. A handy, three-minute glance at the week ahead in companies, markets, regulation and investment, landing in your inbox every Monday morning. Our weekly culture newsletter – from books and art to pop culture and memes – sent every Friday. A weekly round-up of some of the best articles featured in the most recent issue of the New Statesman, sent each Saturday. A newsletter showcasing the finest writing from the ideas section and the NS archive, covering political ideas, philosophy, criticism and intellectual history - sent every Wednesday. Sign up to receive information regarding NS events, subscription offers & product updates.

Last year the former local MP, Louise Ellman told the New Statesman that the new building was “90 per cent” complete. Indeed, wards and operating theatres had been fully fitted with the latest equipment. But after Carillion was declared bankrupt under a mountain of debt – the largest ever trading liquidation in the UK’s history, reporting £7bn in liabilities and cash holdings of just £29m – work on the Royal Liverpool came to a halt.

A parliamentary report into the outsourcing giant’s failings described its business model as “a relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers”. With its “complicit” accountants and auditors, it had misrepresented its accounts with “increasingly fantastical figures” while increasing its dividends every year. During a meeting of the BEIS select committee, KPMG, Carillion’s external auditors, were told by Hove MP Peter Kyle that they couldn’t be trusted “to audit the contents of my fridge”.

Content from our partners
How do we secure the hybrid office?
How materials innovation can help achieve net zero and level-up the UK
Fantastic mental well-being strategies and where to find them

After Carillion’s downfall, the Department for Health and Social Care decided to provide public funds to complete the hospitals, whilst ensuring that there was no “bail out” of the PFI scheme, or any attempt to reduce the risk to lenders. The department did, however, pay £42 million in compensation to Royal Liverpool’s investors to terminate the PFI contract, before further problems on Carillion’s Royal Liverpool were encountered that increased completion costs from £117m to £293m. The problems, encountered by new contractors on site, included Grenfell-style cladding that breached regulations for healthcare premises, and cracked concrete beams that undermined the building’s structural integrity and led to the ripping out of three of the hospital’s brand new floors. According to the NAO, if the increase in costs had been foreseen, no compensation for termination of the contract would have been paid.

Under John Major, Tony Blair and Gordon Brown, PFI and PPP schemes flourished as a convenient way of paying for costly public infrastructure projects – new hospitals, prisons or transport networks, for example – without adding to public debt. Instead of using (much cheaper) government borrowing to finance this kind of capital spending, government departments would seek (much costlier) private finance, and, in this way, keep expensive projects off the books and huge sums out of the deficit figures.

But as an accounting trick this is an incredibly short-sighted one. The NAO estimates that privately financing public projects can be 40 per cent higher than when projects are financed by direct government borrowing, because the taxpayer spends long periods paying exorbitant interest rates to private lenders (governments can borrow at far lower rates than private entities). Over the next 25 years, the taxpayer will spend £200bn servicing PFI debts, more than six times times the UK’s government deficit in 2018.

Johnson himself, when Mayor of London, was an outspoken critic of private financing schemes. “In other countries this would be called looting, here it is called the PPP,” he said, in the midst of a PPP controversy involving Transport for London. Phillip Hammond, the previous Conservative chancellor, claimed to have put an end to PFI. But if Johnson is to square the circle of increased spending on the NHS, stimulus programmes in the “left behind” areas of the former “red wall” and Brexit, all while reducing the government’s debt pile, he may find himself tempted to reopen the door to private finance once more.