How private finance is crippling health and social care

David Rowland | November 7, 2023 | Blog

Private Finance Initiatives have resulted in NHS Trusts in England being locked into financial constraints for which they bear the full risk. New research reveals the full scale of the financial burden these profit-seeking arrangements entail. To protect the health and social care systems, the lessons from this enduring hangover must be learned, argues CHPI director David Rowland in the London School of Economics Policy Blog.

It is no secret that the UK’s public infrastructure is in dire need of investment, including in the health and care sector. It is not only the recent RAAC crisis which has revealed the parlous state of many of the country’s hospitals – it has been known for many years that a lack of capital investment in NHS hospitals has meant that a backlog of repairs has built up that now amounts to an estimated £10 billion worth of costs. In addition, over 80 per cent of the England’s care homes beds are in facilities which were built more than 40 years ago and are poorly suited for the types of complex care – in particular dementia care – which care homes are now required to provide.

Lagging behind

Added to the underinvestment in existing infrastructure is the lack of investment in new facilities to meet growing population need. While much of the infrastructure strategy within the NHS has focused on providing care in the community and out of hospitals, the COVID-19 pandemic revealed what many working in the health service have known for years – hospitals operating at 90 per cent bed occupancy and with fewer beds per head of population than most other OECD countries is not a viable strategy for addressing the demands of a growing, and increasingly older and unhealthy population. The recent NAO report into the government’s ailing hospital-building programme confirms the extent to which estate planning in the NHS remains firmly behind the curve.

For the mainly privately provided care sector, no such infrastructure strategy exists. Instead, policymakers expect that market forces will produce sufficient facilities to meet population need, even though much of the new capital investment is taking place in the richer areas of the country where there are greater opportunities to make a return from wealthier families who can afford to pay privately for their care.

While both main political parties are alive to the need for investment, neither has come up with a plan or a mechanism for funding it. The so-called “fiscal constraints” which frame the debate about public spending partly explain the policy vacuum in this area, but so too does the enduring hangover of relying on private finance as an alternative to public sector borrowing.

Why private finance casts a long shadow over public health

In the NHS, the use of the Private Finance Initiative (PFI) to build new healthcare facilities has locked NHS Trusts into 25 year-long concession arrangements and has created highly effective vehicles for financial stakeholders to suck billions of pounds in dividend payments out of the NHS budget.

And the amount of taxpayer funds which have been syphoned off from some of these schemes is jaw-dropping. Our analysis of 99 NHS PFI schemes has found that since 2004, almost £2 billion has been generated in profit before tax and over £1 billion paid out in dividends. In the case of the company which was set up to manage the University College London Hospital (UCLH) PFI, 50 per cent of its turnover is recorded as profit before tax over this period and it has paid out £200 million in dividends.

But these excessive profits are not the total amounts extracted from the NHS budgets via these contracts and may even be just the tip of the iceberg. For example, the profits made by the companies subcontracted to deliver facilities and maintenance services within the hospital on a day to day basis as part of the PFI contracts are not included in these figures.

Nor are the interest payments on the high-cost loans of up to 15 per cent which the companies making up the PFI consortia have issued to part finance the construction project. We calculated that in seven projects, around £131 million has been generated in interest payments on these high-cost loans since 2004, suggesting that the amounts generated through these loan arrangements across all PFI schemes could well exceed the amounts thus far paid out in dividends.

In addition, these schemes come with high transaction costs. We found that £47 million has been paid out in fees to the Directors of companies which employ almost no staff and around 3 per cent of the total turnover of these schemes goes towards administrative expenses.

Bearing the brunt of risk

The initial argument in support of using PFI was that these rewards could be justified on the basis that the private sector bore the risk of project failure, in the sense that they did not receive any income from the NHS until the new hospital had been built and was up and running.

However, the extent to which the public sector has de-risked these investments for private financiers can be seen not only in the fact that, in the event of contract termination, the public sector must still pay back the debt, but also in the fact that the NHS bears the risk of inflation.

Unlike pretty much every other part of the economy, those with equity stakes in PFI schemes do not need to worry about rising inflation; in most cases their annual income rises automatically according to the Retail Price Index (RPI), irrespective of whether their costs increase by the same rate.

For Trusts, this contractual requirement compounds the affordability problems they have struggled with since these contracts were signed – irrespective of whether they have sufficient funds to provide patient care, they must give priority to paying their PFI bills over and above everything else. In the case of the UCLH scheme, the inflation-driven rise in the costs of their PFI scheme has been noted as a significant financial risk in this year.

With RPI inflation estimated to be around 14 per cent for this financial year, we have calculated that this has added an additional £470 million to the NHS PFI bill over the last two years.

A comeback on the cards?

Although the PFI was not widely used in the care home sector, over the past 40 years both Labour and Conservative governments have relied on private finance to build or renovate care facilities for older people. Blocking local authorities from borrowing to build or upgrade care homes led to the transfer of large numbers of local authority-run homes into the private sector and opened up the door to offshore investors to take ownership of big chunks of this part of the UK’s care infrastructure, in some cases through using high-cost debt that was loaded on to the care homes to fund the purchase.

As we have also documented, the amount of money which should go towards frontline care (for example paying care staff) but which leaks out to offshore investors in the form of profits, dividends, rent and debt repayments runs to hundreds of millions of pounds a year.

The experience of using private finance to invest in health and social care infrastructure shows that it comes with a very high cost, extracts scarce resources out of stretched budgets and produces investment decisions which are based on financial returns not on population need. However, despite this, and despite the Government’s recent moratorium on the use of PFI, recent comments from Ministers and those close to the leadership of the Labour Party suggest that a reprise of this policy may be on the cards.

There is therefore a clear need for those advocating different models of financing for health and social care to make their voices heard and for all policymakers confronting the challenges of re-fitting the UK’s health and social care infrastructure to learn the very clear lessons of the past. Turning to private finance as a quick-fix solution to decades of underinvestment has long-term side effects which cannot be ignored.

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About the author

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David Rowland

David Rowland is CHPI's Director. He joined the organisation in 2019 after over a decade of working in senior policy positions within the healthcare regulatory sector. For David's full bio see our People pageSee all posts by David Rowland