Since the COVID-19 pandemic, NHS England remains in crisis. We are now accustomed to ambulances queuing outside accident and emergency departments, bed shortages, growing waiting lists for elective care, and old, crumbling hospital buildings. In this article, from our On Infrastructure publication, Professor Anne Stafford examines the consequences of using private finance to deliver healthcare infrastructure and services, through exploring the expense of privately financed but publicly funded hospital schemes (known as the Private Finance Initiative, or PFI) and reveals a lack of visible and joined-up public accountability.

• Policymakers should be aware of a shift to a two-tier NHS capital estate as up-to-date PFI hospitals increasingly outshine shabby and dilapidated older hospitals.
• This will impact on service delivery, with a rise in health inequalities a likely consequence.
• Another implication is a lack of transparency around the significance of private financing and its impact on the public purse.

What are the financial consequences of using PFI for hospital buildings?

Expenditure to keep NHS hospitals up to date has been an issue since NHS formation in 1948. Many old buildings are still in use and in a poor state of repair due to structural failure and lack of routine maintenance. Governments in power from 1979 put little investment into hospital infrastructure. From 1997 to 2010, the government addressed the problem by using PFI to deliver 109 hospital projects (around 20% of English NHS hospitals).

PFI hospitals are built using private finance, with government paying the private provider an annual rental charge to cover the cost of building the hospital, and a service charge, which covers operating and maintenance costs. Charges include the finance costs of the debt borrowed to build the hospitals and a profit element for the private partners. Charges increase according to criteria laid down in the contract, which can mean steep increases when inflation is high. Contracts last for between 30 and 60 years.

PFI hospitals are more expensive to operate than non-PFI hospitals, but as there is an enforceable contract in place, the private partners must ensure that PFI hospitals are properly maintained. In contrast, austerity policies since 2010 mean backlog maintenance on non-PFI hospitals, which is not planned maintenance work, but rather the work which should have already taken place, has increased from £4bn in 2012 to £11.6bn in 2023, an increase of 290% and greater than the £8bn allocated by the government in 2022 for capital investment to 2030. Of particular concern is an estimate of £6.3m for ‘high’ and ‘significant’ risk backlog.

Research findings – affordability and infrastructure

My University of Manchester research examines affordability issues relating to hospital infrastructure in detail. Whilst PFI charges, in total, only represent around 1.4% of total NHS spend, at local trust level they can create affordability issues.

Some trusts have reduced costs by taking actions on their PFI contracts. Two trusts terminated PFI contracts, reducing their annual operational expenditure, although it is an expensive process, with significant financial penalties being paid to break the contract. Another trust went bankrupt over the high cost of its two PFI hospitals, in part because the finance costs were much higher than the average, thereby pushing up the deficit. Affected hospitals had to be transferred into other nearby trusts.

A further hospital managed to exercise a break in its soft Facilities Management element, reducing its service payment by around £9m per year. Barts Health NHS Trust, which has the UK’s largest NHS PFI scheme, decided at the time of construction not to fit out two whole floors of the Royal London Hospital in a bid to reduce operational costs from the start. Even with this decision, actual PFI charges remained higher than originally projected.

NHS trusts usually consist of more than one hospital. Frequent mergers take place between trusts, often with the aim of meeting financial challenges. At trust level, financial decision making is therefore likely to prioritise PFI over non-PFI hospitals because the former’s costs must be paid due to the binding legal contract with the private provider.

My University of Manchester research examined the financial position of the trusts with the five largest PFI schemes, all of which also contain non-PFI hospitals, and their related private partners over the period 2017-2022. Four trusts experienced mergers during the past decade, with one trust undergoing three mergers. All trusts recorded at least one deficit, and four recorded at least three, despite receiving additional COVID-19 income.

Overall, the five trusts show a continuing pattern of recorded deficits and/or rising backlog maintenance, whilst in contrast their PFI private partners were delivering good, low-risk returns for their financiers. Moreover, the outflow of high finance costs plus any profits means less money remains within the NHS for tackling healthcare problems.

What’s the likely future for NHS infrastructure?

We remain in a crisis position, with continued underfunding and a growing pool of poorly maintained infrastructure, yet increasing numbers of patients.

One likely outcome is that a two-tier hospital system may develop in England, as patients who can, will choose to attend modern, well-maintained buildings for elective care, over older, more inefficient structures. Patient choice could ultimately lead to destabilisation and intra and inter-trust tension across the system, dependent on how combinations of PFI and non-PFI hospitals, bed numbers and PFI charges play out in a complex scenario.

Exactly what will happen is difficult to predict. A systematic decline and fragmentation of monitoring and transparency of accountability and evaluation of financial performance over time makes it difficult to properly scrutinise the financial impact of using private finance for hospital infrastructure. However, we do know there are insufficient resources available to permit fair allocation across trusts, meaning that in reality the main choice patients have for prompt treatment is whether they are willing and able to pay for private healthcare. This increases health inequalities.

Recommendations for a robust and reliable NHS infrastructure

The government should seek out examples of best practice in hospital buildings construction and utilisation and share them centrally, so that new fit-for-purpose buildings can be delivered efficiently and at affordable cost. There needs to be greater oversight of the interface between the NHS, the Department of Health and Social Care and the Treasury in relation to the joined-up provision of care.

Many non-PFI hospital buildings are in a poor state of repair and unfit for purpose. Government should set out a policy commitment on a rolling programme of capital investment using public finance, prioritising the replacement of worn-out buildings and addressing the shortage of hospital beds in under-resourced trusts.

Government should ensure total health spending is at least the pre-Covid long term average of 3.8% growth per year, or even better to the level of growth experienced under the last Labour government of 6.7%. This would ensure that NHS trusts containing PFI hospitals can afford to pay the high charges levied by the private sector, whilst maintenance work on non-PFI hospitals can be carried out in a timely manner.

A policy decision to slow down or abolish change and merger across NHS trusts would lead to more stability for financial decision making across regions.

Public accountability and oversight of capital investment in the NHS needs to be strengthened going forward, potentially going beyond the remit of the National Audit Office.

There is great scope for the Parliamentary Public Accounts Committee to make recommendations and take actions.  These could include evaluation of the use of private finance and a fair return in healthcare, a challenge to private sector legitimacy and a more transparent allocation of taxpayers’ money to healthcare services.