Kill or cure? What price a private finance injection if Brown signs the NHS's life away?

Under the 'Lift' initiative, billions are being spent on upgrading Britain's health facilities. But, as Mark Leftly reports, there is a sting in the tail
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The Independent Online

The Department of Health could lose out on millions of pounds of future profit as it sells GP surgeries and dental practices around the country to private companies under the Local Improvement Finance Trusts (Lift) programme. This latest move is part of the Government's drive to revamp the country's health estate while avoiding increasing the state's borrowings.

Since Labour came to power in 1997, the health department has spent £11.5bn on new facilities through the private finance initiative (PFI) and Lift. But unions and left-wing academics, such as Edinburgh University's outspoken Allyson Pollock, believe the Blair and Brown governments have in effect handed over operational control of the NHS by allowing private sector firms to build, run and maintain hospitals and healthcare facilities.

Critics even claim this is "privatisation by stealth" – the warning made by Charlotte Hancock, the former general secretary of the Royal College of Nursing, about the direction of the NHS in 2001.

Under Lift, more than £1.5bn has been invested in 210 small health buildings. Through a "LiftCo", the private sector joins forces with Community Health Partnerships (CHP) – a com-pany owned by the Department of Health – and public sector bodies such as local authorities and primary care trusts (PCTs) to build and maintain properties for a typical 25 years. A CHP spokesman says these buildings are "state of the art" and "often in deprived areas", and so stimulate the local property market.

However, the structure of the contracts means it is the private sector that will benefit most from the value of the land and the assets on it, should they be sold. Most of this land belonged to the local authorities and PCTs in the first place.

Under the PFI, construction giants like Skanska and Balfour Beatty have led consortiums building, running and maintaining major hospitals, such as the £1bn St Bartholomew's and Royal London redevelopment. These schemes have offered vast rewards: the National Audit Office found that private sector shareholders could end up with returns as high as 60 per cent.

But doing up a simple GP surgery was not as rewarding. Major developers were not going to bid for a project where profit would be measured in thousands rather than millions of pounds. To get round this, the Department of Health offered the private sector a whole area – such as Barnsley and east London in the first wave of Lifts – where it would be guaranteed work on several surgeries and smaller health projects, with the promise of more to come as facilities required upgrading. This bulked up the value of a contract – for example, the capital cost of the first three tranches of the east London Lift is £60m – creating market interest.

The key point is how the partnership is set up. The winning private sector bidder takes a 60 per cent stake in the LiftCo, while the public sector bodies have the other 40 per cent. The assets that are to be redeveloped, or the land that is to be used for new health centres, become the property of the LiftCo. As a result, the private sector gets 60 per cent of any profit made on the sale of assets and land when the contract ends 25 years later – just as they would take most of any hit.

As ever with this type of project, the Government is playing with the books: the capital value of the projects does not go on the public sector balance sheet because 60 per cent of the risk is with the private sector. A senior PFI industry source says: "There are an increasing number of projects where the private sector is carrying the asset – and private sector companies are ready for it."

But the private sector is not really carrying the asset: the capital cost actually goes on the balance sheet of the LiftCo, which is a special- purpose vehicle. "LiftCos are living, breathing entities with their own P&L accounts," explains Lee Clayton, the chief executive of both the North Nottinghamshire and Greater Nottinghamshire LiftCos.

Government rules that stipulate that land ownership cannot be transferred in PFI schemes, do not apply in the new variant model. Mr Clayton makes a fair defence of the ownership transfer. In north Nottinghamshire, he argues, the facilities were in "pretty poor locations" and so the LiftCo sold them to raise money to buy land in more central areas. Sometimes the land owned by the public sector is also too small, and one of the aims of Lift is to consolidate dispersed surgeries, physiotherapy studios and pharmacies.

However, much of the PCT and local authority land is substantial, and has been used by LiftCos for new health centres. The public sector hands over this land to the LiftCo in exchange for an equity stake in the firm. The market price of the land is valued independently, and the PCT will get money if the land is worth more than the equity.

There is a strong rationale at work here. A healthcare lawyer points out that transferring ownership to the LiftCo means it can borrow against the land to fund its programme, rather than raise debt from the more expensive project finance markets. This makes Lift cheaper for the public sector client, which leases the new facilities.

The CHP spokesman insists that the public sector is protected in the long term, as there has to be unanimous agreement between the shareholders on future development. "At the end of the lease ... the PCT can choose to continue to lease the building or can often buy the building on advantageous terms."

And the public sector will still get 40 per cent of the profit if the health centre is sold off to a cash-rich property developer.

But what is clear is that this asset can no longer be considered the property of the taxpayer. It is also clear that had the public sector land been granted to the LiftCo under licence, all facilities would be back in government hands at the end of the contract. The PCT or local authority would then be able to cash in on 100 per cent, not 40 per cent, of the profit generated by the increase in land values.

And note the CHP spokes- man's use of the word "often" about buying back buildings. The inference is that the PCT would sometimes have to pay what could be an expensive market rate for what was once its own land, or at the very least would have to spend money simply to own what are, after all, its key facilities. Alternatively, a generation from now, PCTs could find themselves just leasing a building.

As the CHP spokesman argues, there are compelling commercial reasons for this transfer of ownership. But to healthcare purists, it's the surest sign yet that the Blair-Brown years mark the beginning of the end of the NHS as we know it. The Department of Health will own a shrinking estate, and the NHS will be the owner-occupier turned tenant that lost out on millions in property development.