The government's controversial private finance initiative is floundering. Patricia Hewitt's review of the £1.28bn PFI plan for the Barts and The London hospitals trust, prompted by spiralling costs revealed last December, also raises questions about the whole policy. With 39 PFI hospitals signed up for at a capital cost of £3.2bn and another 41 schemes planned, at a cost of £12bn, the policy is out of control.
So why is it that, when the government continually claims that the virtue of PFI is that it "comes in on time and on budget", runaway costs have suddenly become the most pressing issue? The answer lies in the government's new "payment by results" pricing regime. The Department of Health's policy is to privatise NHS clinical services, hence the need for a market-oriented pricing system.
This requires the NHS move from block budgets, based on contracted volumes of planned work, to a system whereby each treatment has a price tag. The price is set to reflect the "average cost" of that treatment across the NHS. And here's the rub: payment by results has unexpectedly flushed out the true cost of PFI.
Using private finance to build a hospital creates a debt, which must be paid to the private-sector consortium over a 30- to 60-year period. This debt, known as the annual PFI charge, is met from the hospital's operating budget, which pays for staff and patient care.
Since 1991 every NHS hospital has had to pay the Treasury an annual charge for the use of land and buildings. It is therefore possible for each scheme to compare the cost of capital to the hospital before and after PFI. In the case of Barts and the London, the capital cost in 2005 was £8.62m a year. This is the amount the trust must pay the Treasury, which is then paid to the health department and recycled within the NHS system. But under PFI, the cost of capital at the Barts and the London will rise more than eightfold to £67m. The money flows out of the NHS and into the pockets of shareholders and their bankers in the private-sector consortium Skanska Innisfree.
This higher annual cost - £67m compared with £8.62m - creates what is known in the PFI business as an "affordability gap". This is the difference between what the private-sector consortium charges and what the trust can afford.
The ways in which hospital trusts and the government have sought to bridge this gap in the past is well documented, ranging from selling off land and buildings to reducing services and closing acute and community hospitals, as in Kidderminster and Norfolk. Since Labour came to power in 1997, more than 12,000 NHS beds in England have been lost as part of this policy, and the closures are continuing apace.
A large chunk of the current NHS trust deficits has been generated by the annual PFI charge and by unrealistic expectations about both the income and the savings that the schemes would generate. In the case of Barts, the trust is expecting a £37m increase in income from additional patient care and at the same time must plan for total savings of £22m, or 4.2% of turnover.
But how can a hospital generate more patient treatments and income when it has to close beds, cut services and lay off staff to pay the PFI charge? Without a large injection of public funds the trust will be forced to divert hospital budgets still further from staffing to paying the exorbitant PFI charges.
Take the Queen Elizabeth hospital trust in Greenwich. It is struggling under the weight of a PFI contract that it cannot afford, and managers there estimate that £9m of its £19m deficit is down to PFI. If it defaults on the PFI charge, the government could be presented with a bill for the full £140m bond used to finance the deal.
To date the government's response has been to blame trust managers - easy whipping boys. But as the trust's auditors make clear, the Queen Elizabeth has increased its efficiency over the past five years and, when the excess costs of PFI are removed, it actually outperforms the NHS average.
As more PFI hospitals come on stream these problems will be accelerated, compounded by the new tariff system and more austere funding climate. The simple fact is that in the new marketised NHS, the PFI circle cannot be squared with expenditure.
In recent months, the trend of government policy has been to directly privatise clinical services. The halfway house of foundation trusts and PFI hospitals leaves policy too exposed. Once hospitals are fully privatised, the true costs can be hidden under the guise of commercial confidentiality, with the decisions about cuts and closures left to "market forces" and merely endorsed by the independent regulator.
The problems with the Barts and the London PFI scheme are symptomatic of a much wider market-induced healthcare crisis. It is time to commission the full, independent review of PFI that successive Labour party conferences have called for.
· Professor Allyson Pollock is head of the Centre for International Public Health Policy at the University of Edinburgh, and the author of NHS plc
