The demonising of PFI

Firms are quickly learning that building PFI hospitals is a fast way to make enemies. Contractors have been subjected to an onslaught of negative publicity in what appears to be a concerted campaign to discredit the controversial initiative.

"There is a campaign to rubbish PFI," says Deryk Eke, construction director at the Office of Government Commerce's property and construction directorate. "In terms of one of the hospital projects, to blame lack of beds and blocked drains on the procurement route is a bit bizarre. There's been unfair criticism."

Along with many others, Eke is concerned that the backlash could cause long-term damage to PFI. "If PFI gets rubbished, that precludes an opportunity to improve public services. It's going to have a big effect on the government's ability to deliver its promises."

Faced with such relentless criticism, the construction industry has struggled to put its case effectively. Part of the problem is that PFI is so complicated: the Byzantine justifications offered by the Treasury do little to help its advocates. And any defence launched by contractors is bound to be seen as self-serving.

"There has been a fundamental misunderstanding [of PFI] that has been brilliantly exploited by its opponents," says Geoff Thornton, managing director of PFI finance at the Royal Bank of Scotland, citing the unions and left-leaning commentators ideologically opposed to private sector involvement in public service provision. "They're winning the PR war."

However, putting to one side the complex – and contentious – fiscal arguments in favour of PFI, many of the recent criticisms simply do not stand up to serious scrutiny.

Flooded wards and bed shortages
In July, shock reports emerged of overheating atriums, bed shortages, flooded wards and raw sewage in operating theatres at the Amec-built Cumberland Infirmary in Carlisle. This was followed by similar horror stories at North Durham hospital. Both were newly opened PFI facilities; the implication was that profit had been put before patient welfare.

While there are genuine concerns over design quality at PFI hospitals, it is generally agreed that the problems at Carlisle and North Durham are minor issues. "They're trivial criticisms," says healthcare architect Mike Nightingale of Nightingale Associates, who was not involved in either project.

There’s a campaign to rubbish PFI. There’s been unfair criticism

Deryk Eke, construction director, Office of Government Commerce

In fact, most of the problems at Carlisle date back to last spring, when the hospital – the first large PFI project completed – was handed over. In a refutal of the criticisms of Carlisle, which newspapers declined to publish, the Department of Health pointed out that:

• Air-conditioning was omitted from the atriums in accordance with NHS guidelines, but the PFI operator is installing electronic solar blinds at its own expense to counter overheating.
  
• A broken pipe did indeed cause a small amount of water to drip into a ward, resulting in damage to four ceiling tiles, but this was fixed within an hour and at no point were cardiac patients "drenched with water".
  
• A temporary soil pipe bung was erroneously left in place causing a minor sewage overflow in washbasins in an ancillary room (not an operating theatre), but this occurred before the area was opened to patients and was swiftly remedied.

Of the remaining allegations, most – including flea-infested laundry and seven-month delays in examining x-rays – were found to be untrue, trivial or due to factors outside the operator's control.

One serious allegation, however, was substantiated and found to be due to neglect on the part of the PFI operator. There was a 13-minute power failure in part of the hospital, caused by human error, something the PFI operator should have pre-empted by adequate monitoring. This was a serious error and an NHS Estates investigation has led to stricter guidelines being imposed.

"We've looked closely at the allegations raised," says Peter Coates, head of private finance at the Department of Health. "On the whole, we are not alarmed by what has happened."

Coates believes the allegations are all part of a concerted campaign to smear PFI and points out that the issue of bed shortages lies with the NHS, not the private sector:

"If there's concern about bed numbers, it's because the NHS has incorrectly specified."

Excessive profits
News that PFI consortiums were negotiating more favourable financing deals once projects were complete led to a string of hysterical newspaper articles accusing contractors of creaming off excessive profits.

The misunderstanding of PFI has been brilliantly exploited by its opponents

Geoff Thornton, managing director of PFI finance, Royal Bank of Scotland

"It's very unfair, because the attacks ignore the fact that there was no orthodoxy in the first place," says the Royal Bank of Scotland's Thornton. "The debts for the early hospital deals were more expensive compared with now, because these were the pathfinders and the risks were greater. It is these older projects that are being refinanced."

Refinancing reflects the fact that PFI is all about transferring risk to the private sector. Construction is the riskiest part of any project; if it goes over budget, the consortium has to meet the extra cost. Similarly, if construction goes smoothly, the consortium benefits.

Under Treasury rules, refinancing is acceptable practice. Since it does not affect the cost to the hospital trust over the life of the project, the public purse is not being short-changed. However, in the light of recent criticisms, the Treasury is reviewing the rules and is expected to insist on "clawback" clauses of up to 50% of future refinancing windfalls.

But observers believe the days of refinancing windfalls are probably over. Consortiums are recycling potential refinancing gains into lower bid prices. Thornton adds: "Now, the debt is as cheap as it is ever going to be, with the banks scraping a decent rate of return. You won't see any new deals being refinanced. But we are still expecting a kicking over the next year, with a stream of the old projects up for refinancing."

More expensive hospitals
"Builders milk NHS of £600 million" screamed the front page of The Express on Sunday last month. This and similarly sensational stories alleged that PFI hospitals are coming in way over budget, and costing the taxpayer more than traditionally funded projects.

Such reports often confuse the fact that headline PFI costs include the price of operating the facility over 25 years, whereas the corresponding cost of a publicly-funded facility only includes the build cost.

"Part of the problem is that when uninformed people compare costs, they compare input tender costs under the old system with output costs under PFI," says John Spanswick, managing director of Bovis Lend Lease Europe. "PFI output cost includes finance, building and running costs."

Such reports also ignore the fact that if projects do go over budget, the consortium foots the bill, whereas when public sector projects go over budget, the taxpayer picks up the tab. "On average, the bid price accepted [under traditional procurement] was probably 25% lower than final cost," says Spanswick.