The proposed Midland Metropolitan Hospital is due to open in 2018 and will replace City and Sandwell General Hospitals. The 670 bed hospital will be built on a brownfield site on Grove Lane in Smethwick. It will be the first Hospital in the country to be built under the Government’s revised PF2 scheme.
Private Finance Initiatives (PFI) have been used to build most public buildings and infrastructure, such as schools and hospitals over the past 20 years and have proved to be hugely profitable cash cows for large construction companies and financial institutions. According to the latest Treasury figures £11.6 bn worth of NHS PFI projects are set to cost £80bn over the lifetime of the contracts, seven times the value of the original capital.(1)
After huge criticism of blatant profiteering at the expense of the taxpayer the Treasury has changed the arrangements for Private Finance Initiatives with the intention to increase public accountability. It has created a new generation of PFI schemes known as PF2 by investing a minority share of public capital alongside private equity in the front companies set up specially (known as special purpose vehicles) to run individual PFI schemes.
PF2 is still rigged in favour of the private sector and large amounts of money will continue to be paid by the NHS that will end up as company profits and in dividends paid to shareholders. Remember that every pound paid to private contractors is a pound that could otherwise be spent on the health care of us all!
The Sandwell and West Birmingham Hospital Trust is in the last stages of the procurement before the likely 30 year long contract is awarded at the end of the year to build the new Hospital and its maintenance and upkeep. At this stage only Carillon is left as a single bidder for this circa £350m contract after two other companies withdrew their bids.
So what should you know about the plans to build the new Midland Metropolitan Hospital?
1. The Midland Met PF2 will cost more than the public sector alternative
Borrowing private money to fund PFI schemes is always more expensive than public sector alternatives for both borrowing and provision. “The use of PFI has the effect of increasing the cost of finance for public investments relative to what would be available to the government if it borrowed on its own account…financing costs of PFI are typically 3-4% over that of government debt”. (H.of C. Treasury Committee Report into Private Finance Initiative – 2012)
The Sandwell and West Birmingham Hospital Trust has had to prepare a detailed Business case in support of the PF2 and consider the costs of the PF2 against a Public sector comparator. The Outline Business case finds that using a traditional public sector procurement would cost £323.3m at present prices against £392 of the preferred PF2. (2)
2. Private sector risk is rewarded
‘There is substantial evidence that value for money assessments have reflected a pro-PFI bias by giving the false impression that PFI projects are less costly than traditional procurement alternatives.’ (3).
The Outline Business Case prepared by the Trust acknowledges that a public sector procurement is more affordable than the PF2 but in its Value for Money assessment it adds a significant monetary costing of the risks associated with any possible failure in the construction of the new Hospital. This costing of over £105m is used to price out and rule out the public sector procurement option. This is upon the basis that under the PF2 option these risks would be largely born by the contractors.But it should be noted that a House of Commons Treasury Committee inquiry into PFI in 2012 found:
The main benefit highlighted to us by PFI providers was the transfer of construction risk. However h as turnkey contracts which can be used for the same ends.
…We have not seen evidence to suggest that this inefficient method of financing has been offset by the perceived benefits of PFI from increased risk transfer. (4)
3. Overall costs of the Midland Met PF2
The Trust will make an annual Unitary payment towards the cost of PF2 upon the completion of the building of the new Hospital. If a thirty year contract is confirmed, according to the Trust’s figures the Unitary payment for the first year would be £27m and £26.1m over the following 29 years coming to a total of £783.9m. While the Unitary payment includes an operating charge of around £6m for the Facilities maintenance, for the cost of constructing a c..£350m hospital the Private company will have a 30 year contract likely to be worth £784m.
4. Guaranteed Profits to be made: 13% Rate of Return
The Hospital Trust’s own Business case estimates that the internal rate of return for this contract to be 13%, the rate of return is used as the measure of projected profitability for shareholders. (5) The experience of other PFI scheme shows that profitability is often higher than the given rate of return.(6)
5. The costs of the procurement
“Owing to the complexity of PFI, the public sector has become too reliant on expensive external advisers.” (H.of C. Treasury Committee Report into Private Finance Initiative – 2012)
In the world of PFI the benefits are shared with numerous other private players such as those that prepare the contracts and give legal advice, those that advise on the costings and those that draw up the technical specifications. Capita Consulting is involved in various a roles in servicing the procurement with Deloitte’s acting as financial advisors and Pinsent Masons dealing with legal issues. Professional advice on the PFI procurement is costed at £3.2m and the overall cost of the procurement is budgeted at £13.6m. (7)
6. The absence of competition for the Midland Met contract
“The nature of PFI means that competition is likely to be less intense compared to other forms of procurement. We believe the barriers to entry to be too high, resulting in an uncompetitive market. The long, complex and costly procurement process limits the appetite for consortia to bid for projects and also means that only companies who can afford to lose millions of pounds in failed bids can be involved.” (H.of C. Treasury Committee Report into Private Finance Initiative – 2012)
This diagnosis of PFI by the Treasury Committee is highly relevant to the Midland Metropolitan procurement where a lengthy process which started in February 2014 and saw three major PFI players enter the field, Balfour Beatty, Laing O’Rourke-Interserve consortium and Carillion, by April 2015 there was only one contender left. This left the Hospital Trust to make a decision to proceed with a ‘single bidder’ rather than delay the already very costly process and ultimately the building of the new hospital. Being a single bidder for a multi-million pound contract gives Carillon significant commercial advantage in what is intended to be a competitive process.
7. The loss of over 1,700 jobs is planned
The workforce of the Sandwell and West Birmingham Trust is planned to be cut from 7,048 to 5,483 (WTE) over a 9 year period, a 24% reduction. This includes cutting 400 nurses providing acute care and 60 junior medical staff. This represents a financial cut of £79m in the workforce budget. The preparation of the Business case for the PF2 is explicitly being used to drive the ‘reform’ and restructuring of the Trust resources including the workforce strategy. Workforce ‘efficiencies’ are a significant component of the Trust’s overall planned efficiency savings.
“In order to afford the forecast unitary charge and generate support for transitional costs, an internal cost improvement programme has been developed which exceeds expected national efficiency requirements and the impact of activity cessation.” (8)
There will be considerable efficiencies in consolidating the present hospitals onto one modernised site but the Trust’s drive to exceed national efficiency requirements is open to question when it is at the same time providing a profit stream for the companies behind the PF2 scheme?
8. Profiting from the sale of PFI equity
If the contract is awarded to Carillon as would seem highly likely as the ‘single bidder’ left, it will be required to raise the larger part of the capital investment to fund the construction of the new hospital. It will also have an equity holding in the special purpose vehicle, the company that will front the Midland Met PF2.
Carillion is a long standing PFI contractor and was created from the de-merged Tarmac group in 1999, to focus on support services and construction. In its Annual Report and Accounts 2014, the company reported an increase of 15%, from 2013, to its underlying operating profit.
Philip Green, Chair of Carillion being challenged over the companies record on PFI outside the company AGM held in Birmingham on 6th May 2015. Protesters from Barts v PFI were joined by local campaigners from the BTUC Health campaign.
Carillion has been involved in hospital PFIs since the early days, being an equity holder in one of the first, Darent Valley Hospital, Dartford and Gravesham NHS Trust, in Kent. In the Annual Report and Accounts 2014, Carillion reported on its strategy of selling equity in PFIs. “Carillion has led the market in recycling of equity investments in PPP projects, namely reselling investments in mature projects”.
Carillion invested £4m in 1997 at Darent Valley Hospital and made £16m in a sale of equity in 2003. A National Audit Office report in 2005 calculated this represented an annual rate of return of 50%. Carillion had reported to the Commons Public Accounts Committee that it expected to make 15 – 17% on PFI investments. At the Queen Alexander Hospital in Portsmouth Carillion invested £12m in 2000, and sold equity in 2010 for £31m. (9)
In the future, given the commercial strategy of Carillon to sell on its equity in PFI’s, what is to stop the company from selling its equity in the Midland Met PF2 and from further profiting from an asset paid for by the public?
What you can do
Under the Coalition Government NHS funding has been deliberately cut and squeezed in real terms while the Government has opened up the NHS to privatisation and new opportunities for profit by private health companies. Osborne’s reform of PFI by setting up PF2 enables the creation of safe profit streams to private contractors well into the future.
While the former Coalition Government has increasingly starved the NHS of funding by failing to increase it in line with the growing health needs of the population recent research by the Birmingham Post shows the cost to the public of paying off all the PFI projects in the West Midlands will be £12.7 billion. This is no accident.
30 year long contracts lock out the public and their scrutiny. In 2006 there was a public consultation on the plans for Midland Metropolitan development but the public in Sandwell and West Birmingham need to know about and be consulted upon the arrangements and costs for financing the new Hospital. There must be effective democratic consultation and public debate on future PF2’s including that of Midland Metropolitan Hospital.
If you are concerned that our NHS should not be a source of corporate welfare you can:
– Come to the AGM of the Sandwell and West Birmingham and Hospital Trust on the evening of 25th June (18.00 at Sandwell Hospital) to question and challenge the Trust Board on the PF2.
– Get involved in the Health Campaign of the BTUC by contacting email@example.com
Every pound of PFI profit is a pound that could otherwise be spent on the health care of us all!
Defend the NHS! Invest in public health care for all not in corporate welfare!
(1). p18 Davis,J. Lister,J. Wrigley,D. NHS for Sale – Myths, lies and deception
(2). Pollock A, Price D (2013) PFI and the National Health Service in England. http://www.allysonpollock.com/wp-content/uploads/2013/09/AP_2013_Pollock_PFILewisham.pdf
(3). P227 Outline Business Case – Sandwell and West Birmingham Hospitals NHS Trust Midland Metropolitan Hospital Project (2014)
(4). H.of C. Treasury Committee Report into Private Finance Initiative – 2012
(5). P226 Outline Business Case
(6). Cuthberta J.R. Cuthberta M. Why IRR is an inadequate indicator of costs and returns in relation to PFI schemes. (2012)
(7). P243 Outline Business Case
(8). P209 Appointment Business Case Sandwell and West Birmingham Hospitals NHS Trust Midland Metropolitan Hospital Project (2015)
(9) Briefing prepared by Barts v PFI – Carillion and Barts PFI (or how companies are making millions from our NHS at the expense of patients and staff ) (2015)
(With thanks to Barts v PFI for their advice and information contained in Point 8)