Private Finance Initiative (PFI) schemes

Background

Prior to 1948, the building of hospitals and community health facilities was the responsibility of local authorities. However, due to the legacy of World War Two, the majority could not afford to fund such projects. In the mid-1950s, the gradual release of funding allowed for new hospital building in certain areas.

In 1962, Enoch Powell became minister of health and advocated an urgent hospital-building programme. The resulting hospital plan generated major hospital investment. However, it proved to be financially unviable and within 4 years a major revision was required.

Competition between private providers

The Conservative government introduced private finance initiatives (PFI) in 1992, with the objective of harnessing the private sector's efficiency, management and commercial expertise. The Labour government continued with them upon its election in 1997. 

PFI involves contracting out the design, building, financing and operation of public services to private sector companies through long-term contracts. The initiative introduced competition between private providers to build and finance hospitals. 

PFI was used where there was a significant investment needed to build an asset, followed by ongoing service requirements. PFI agreements have been used to build schools, hospitals, roads and prisons.

There has been a mixed legacy for PFI in the NHS. On the one hand, PFI enabled capital investment in hospitals which might not otherwise have happened. Only seven public schemes costing more than £25m were completed between 1980 and 1997. This compares to 34 hospitals built between 1997 and 2003, when PFI was implemented.

Criticism

The PFI faced criticism because it involved repayments being made over the long term at a high rate of interest. This increased the amount of debt to be paid for by future taxpayers.

In addition, the increased costs of the PFI were met through hospital closure programmes and reductions in services, which were seen by some as affecting the quality of healthcare received by patients.

In 2012, the Public Accounts Committee expressed concern that some trusts in financial difficulty were having to service PFI contracts. Their charges were so high that it was not feasible for trusts to break even.

Source(s)

Roe P, Craig A.
Reforming the Private Finance Initiative.
Centre for Policy Studies; 2004.

Gaffney D, Pollock AM, Price D, Shaoul J.
NHS capital expenditure and the private finance initiative - expansion or contraction?
BMJ.
1999; 319(7201): 48–51.

HM Treasury.
A new approach to public private partnerships.
HM Treasury; 2012.

House of Commons Public Accounts Committee.
Sixteenth Report.
Department of Health: securing the future financial sustainability of the NHS.
UK Parliament; 2012.