Finance: Unhealthy row over PFI plan for hospitals

Treasury and ASB are at loggerheads over a political matter.

THE PRIVATE Finance Initiative looks set to hit further trouble, with the disclosure that the Treasury and the Accounting Standards Board still seem unable to reach agreement on how to account for PFI deals. Meanwhile, political opposition to the PFI has been taken on by the British Medical Association, concerned that there could be major job losses of doctors and nurses at hospitals that are redeveloped using the PFI.

It had seemed likely that the ASB, headed by the no-nonsense Sir David Tweedie, and the Treasury would reach a compromise on PFI accounting. Conciliation had been assisted by the Treasury allocating an official to sit on the ASB's working party to examine PFI arrangements, and the group visiting PFI-funded projects to see the benefits of the schemes for themselves.

But after months of discussions the Treasury is still determined to attract private finance to redevelop the public infrastructure, while not counting it against the Public Sector Borrowing Requirement or the now increasingly used General Government Financial Deficit. The ASB, is equally adamant that where there is an asset, financed by underlying debt, it should appear on a balance sheet. Past failures to report such debts were a prime cause of corporate failures, it points out.

In the end, says the Treasury, it can do what it likes. The ASB has jurisdiction only over the private sector. But,says the ASB, this makes a mockery of the Government's attempts to harmonise private and public sector accounting standards.

The ASB recently conducted a survey of accountancy firms to ensure they supported the ASB's line. The outcome was another division. Auditors were fully behind the ASB. Corporate finance advisers, on the other hand, did not want to undermine the PFI's progress.

It is wrong, says the ASB, to treat all public assets the same, and assume that risk can equally be transferred from the public to the private sectors. "A road may easily transfer to the private sector, but with hospitals it is more difficult," says Allan Cook, technical director of the ASB. "Most of the risks in a hospital will not be connected to the building. The risk will still be borne by the Government."

Mr Cook says the Treasury is wrong to focus so heavily on risk transfer. A good PFI deal may still be justifiable without a transfer of risk if it achieves a reduction in revenue costs, even if the debt is still incurred by the Government, which can borrow more cheaply than can the private sector. But, says Mr Cook, it is wrong for the Treasury to hide a debt which, if the crunch came, it would have to pick up.

A similar point is made by Ken Wild, of Deloitte & Touche. "At the moment people associate the PFI with off-balance sheet finance, which is seen as an accounting fiddle," he argues. "It is not in anybody's interest to have it viewed in that way."

Concerns have also been raised that the real cost of PFI deals in the long term may be higher than traditional borrowing arrangements.

Significantly, what has previously appeared to be an esoteric debate between accountants and civil servants is now taking on a wider political dimension.

Dr Jean Shaoul, of Manchester University's department of finance and accounting, is a strong critic of the PFI. She says that the public sector's move to resource accounting and the Treasury's drawing up a "Domesday" list of public assets, taken with the failure of the Government itself to finance capital projects, will exacerbate pressures on health trusts to enter into PFI contracts.

Under the Treasury's new resource accounting and budgeting rules, public bodies must now achieve a return on capital of 6 per cent. This aim is artificially made more difficult, argues Dr Shaoul, by valuing hospital buildings at current replacement cost, rather than at historic cost as the private sector would do. The rate of return can only be achieved by some hospitals if staffing levels and services are cut, and surplus land disposed of.

It is often the surplus land that makes hospitals particularly attractive for PFI deals, but underused land may be situated in the middle of a complex. This is leading to pressure to redevelop entire hospitals, even when comparatively modern. What is more, Dr Shaoul adds, there has been an average reduction of 30 per cent in beds and clinical jobs where hospitals are replaced under PFI contracts, because of the high PFI charges. But, she says, staffing cuts threaten income generation.

It has been assumed by health trusts and the Government that this bed and staff reduction is sustainable by discharging patients more quickly. Dr Shaoul and the BMA challenge this, saying that with more elderly and single people the policy can work only if local authorities and families take on responsibility for post-operative care.

Dr Shaoul predicts serious problems if the Government does not rethink both its PFI and resource accounting rules. "They are financially unstable, and will have dire consequences of massive job losses and service reductions," she predicts. "They are effectively liquidating the public sector."