PFI is supported by 'spurious economic arguments'

July 07, 1999

(PFI in the NHS - is there an economic case?)

Clinicians should not allow themselves to be deterred from criticising the PFI by spurious economic arguments say the authors of an article in this week's BMJ. In the second of a series of articles on the government's controversial private finance initiative in the NHS, the team of researchers from UCL, Manchester and Newcastle argue that the government's claim that PFI hospital schemes represent better value than public funding is not supported by the evidence.

The annual cost of paying private sector financing charges, they point out, is between 11 and 18 per cent of the cost of building the hospitals. They argue that the government could finance these schemes itself by borrowing at 3 per cent interest rates, thus saving the taxpayer millions of pounds. The authors believe that these extra costs are largely being met through cuts in services and subsidies from the NHS capital budget.

In comparing the costs of PFI with public procurement, Gaffney et al argue that the government does not use the full costs of the investment, but discounts the costs at a rate of 6 per cent. This favours privately financed options say the team and effectively disregards the lower cost of public sector borrowing. The authors say that they show how very slight changes to the discount rate eliminate the apparent economic benefits of PFI.

PFI business cases have tended to justify high private sector costs by arguing that the private sector is taking on risks under the contract which they are entitled to be paid for: sums of between £18 and £62 million have been allowed for risk transfer, say the authors. They show that in many cases risks have been ascribed to the private sector which they have not in fact taken on.

The authors also point out that PFI business cases have consistently overestimated the inefficiency of public sector procurement: one trust assumed that any publicly funded scheme would overrun on costs by 34 per cent, when cost overruns in the NHS have been between 6 and 8 per cent during the 1990s.

They conclude that government's formal appraisal of the PFI is not objective and that it disguises the higher cost of private sector provision.

Dr Allyson Pollock, Head, Health Policy and Health Services Research Unit, School of Public Policy, University College, London


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