Private finance and the NHS: profits before patients or value for money?

From Mr John Kelly

Sir: The new NHS guidance on the Private Finance Initiative (PFI) referred to in Rosie Waterhouse's article "Private firms to run NHS hospitals" may remove some of the confusion that has latterly bedevilled capital investment in the service, but a fundamental conundrum remains.

Simply, as even the Treasury acknowledges, private finance will invariably cost more, in interest repayments, than exchequer funding. This is because the private sector expects a faster payback and because of transaction costs. Trusts exploring the PFI for major projects are being advised to budget £500,000 upwards for legal costs alone.

Proponents of the PFI argue that the higher cost of borrowing can be offset in two ways: first, by the introduction of private-sector expertise to achieve greater efficiency and value for money, and second, by the private sector bearing a greater share of the risk associated with any project. As far as efficiency is concerned, there are undoubtedly activities that can be better run by non-NHS organisations, but these are typically peripheral support services, such as car parking, incineration and waste disposal, which are already regularly outsourced.

In the provision of core clinical services, however, any private sector operator will have to climb a long way up the experience curve to match NHS providers. While the NHS may have lessons to learn from the private sector, just how much may be judged by comparison with, for example, the US healthcare system.

As for risk, the private sector will extract a premium for bearing it, so the idea that risk transfer can justify higher interest rates may rapidly become a zero sum exercise. This is illustrated by the recent tendering of cardiac services at Morriston Hospital, to which your item referred. Here the NHS bid was successful because, it is suggested, private competitors charged for the perceived risk of a short-term commitment by purchasers. In-house tenderers may correctly judge that the political unacceptability of pulling the plug on NHS providers lowers their risk, and set prices accordingly. This situation would change only if the Government were prepared to countenance a version of the market in which trusts could go to the wall, which seems highly unlikely in the current electoral timescale.

The proponents of the PFI argue that risk should reside with the party best able to manage it. Post-Barings, it should be clear that this may not always be the private sector.

Yours sincerely,

JOHN KELLY

Director

Rawlinson Kelly Whittlestone

Health Service Planning

Consultants

London, W1