Taxpayers pay ‘well over odds’ for new hospitals

Replacements for PFI funding model continue to see a premium paid for big capital projects

Wednesday 21st August 2019

Taxpayers in Scotland will pay private consortiums more than £2.6bn over the next 25 years for health service construction projects that cost less than £1bn to build.

The lifetime costs have been revealed following analysis from healthandcare.scot, published in the table below.

The Scottish Government insists the schemes represent value-for-money because the final price tag includes maintenance fees over the length of the contracts.

But trade union UNISON Scotland, which represents more than 60,000 NHS Scotland staff, has told healthandcare.scot the decades-long contracts are “short-term gain for long-term pain” because “we end up paying well over the odds.”

Under complex financing schemes run by the government-owned Scottish Futures Trust, private companies finance, build and maintain hospitals and health centres in exchange for repayments over a 25-year period.

Scottish Government financial reporting documents show 19 health projects have been funded using two types of public-private partnership since the SNP came to power in 2007.

Most were funded under hub schemes that see a consortium of public bodies award projects to an agreed set of private developers.

Others were financed under the Non-Profit Distributing model, a revamped version of the controversial Private Finance Initiative (PFI) that was used extensively when Labour was in power in Scotland.

In both cases, developers receive yearly payments that cover the cost of the building, interest and ongoing maintenance.

Earlier this month it was reported NHS Lothian had started repayments for the new Sick Kids hospital despite being unable to use the facility because of ventilation issues that could compromise patient safety.

Upfront construction costs were £150m but the final bill will add up to £416m by 2043.

The largest project in Scotland financed by the non-profit distribution programme (NPD) is Dumfries & Galloway Royal Infirmary, which opened in 2017. Costing £212.6m to build, the public sector will end up paying £536.2m by the end of the contract in 2043.

According to economist Jim Cuthbert, part of the motivation for this financing mechanism was to get debt off government books and into the hands of private companies.

However, a recent ruling by the Office for National Statistics that concluded this was in fact government debt, he says, “destroyed the rationale for NPD.”

The former chief statistician for Scotland says NPD was introduced to overcome flaws in PFI that had seen private equity providers extract “grotesquely large” profits. In NPD, unlike PFI, private sector returns are effectively capped when the contract is signed.

“But the NPD model itself has significant problems”, Mr Cuthbert adds. “The size of individual schemes still tended to be large, so reducing the scope for competition, and hence potentially leading to poor value for money.

“And the ability to detect potential problems is severely restricted by the significant delay before the financial models of NPD schemes are made publicly available: and by the lack of adequate monitoring information on the average performance of NPD schemes as a whole.”

He warns the replacement for the financial scheme – known as the Mutual Investment Model – has “characteristics which are, in several respects, more like old PFI: in particular, there will be the potential for the owners of equity to take significant dividend profits. So, while NPD was problematic, its successor is likely to be even more so.”

Danny Phillips of UNISON Scotland says his organisation does not support the approaches being taken:

“UNISON has always argued that PFI and other public-private capital partnerships administered by Scottish Futures Trust are short-term gain for long-term pain as these contracts run for decades. Capital projects are expensive and of course they have to be paid for, but the problem with PFI and other contracts like this is we end up paying well over the odds.”

“As your figures show this model continues to be central to the Scottish Government’s way of funding public infrastructure investment. However, the Scottish Government should look at using its own borrowing capacity to buy these contracts out and refinance them directly – it could save public sector budgets billions in the years ahead.”

A Scottish Government spokesperson said: “The NPD and hub programme has provided essential investment in new healthcare facilities such as the Dumfries and Galloway Royal Infirmary, Royal Edinburgh Hospital, Scottish National Blood Transfusion Service National Centre, as well as numerous health and social care centres in Lothian, Lanarkshire, Grampian and Greater Glasgow and Clyde.

“The unitary charge payments includes payment for the ongoing investment in maintaining these facilities over the life of the contract, so are not directly comparable with the capital value of the facility.

“NPD delivers far better value to the public purse than PFI and the financing of NPD projects has compared very favourably with past PFI projects.”

 

 

 

                     Health service projects since 2007: cost and repayments

 

 

 

Project

Capital value (£m)

Total repayments over contract (includes facilities maintenance charges) (£m)

Aberdeen Community Health and Care Village

15.6

48.8

Acute Mental Health & North Ayrshire Community Hospital
(Woodland View at Ayrshire Central Hospital)

46.6

132.5

Acute Services Redevelopment Project (Dumfries & Galloway)

212.6

536.2

East Lothian Community Hospital

70.4

173.6

Forres, Woodside and Tain Health Centres

13.6

43.8

Gorbals & Woodside Health Centres

37.4

90.5

Greenock & Stobhill Health & Care Centre

31.4

75.4

Inverclyde Continuing Care Beds for Mental Health

8.4

20.9

Inverurie Health Care Hub & Foresterhill Health Centre

21.0

51.9

Lothian Partnership Centre Bundle

28.4

66.5

Maryhill Health Centre and Eastwood Health & Care Centre

21.5

66.9

Mental Health Development – Tayside (pre 2010)

95.0

359.8

NHS Lanarkshire Bundle
(Wishaw, East Kilbride and Kilsyth Health Centres)

38.9

108.0

NHS Orkney New Hospital & Healthcare Facilities

64.1

57.2

Pharmaceuticals Services (Tayside)

25.8

63.4

Redevelopment of Royal Edinburgh Hospital Campus - Phase 1

38.4

117.3

Royal Hospital for Sick Children / Department of Clinical Neurosciences

150.0

416.4

Scottish National Blood Transfusion Service National Centre

33.3

97.7

Stirling Care Village

34.8

85.3

TOTALS:

987.2

2612.1