There can’t be many issues that unite Jeremy Corbyn and Andrew – now Lord – Lansley, but the impact of the private finance initiative on the NHS is one of them.

Corbyn has called for a fund to be established to bailout NHS trusts saddled with PFI schemes. In 2012 Lansley gave seven NHS trusts whose PFI deals were unaffordable access to a £1.5bn fund. All the deals had been negotiated under the Labour government.

Last year an inquiry by the public accounts committee into the financial stability of NHS organisations laid bare the huge burden that PFI deals for building and operating NHS facilities is imposing. Almost a third of providers have a PFI scheme, costing the NHS a total of £1.8bn year. Trusts with the highest charges were most likely to have poor financial results – in 2013-14 four of the six trusts with deficits of more than £25m had a PFI scheme.

As a National Audit Office report (pdf) on NHS finances at around the same time highlighted, one of the causes was overoptimistic forecasts in the business cases for the PFI schemes. They were being negotiated at a time of rapid NHS funding growth, when ambitious foundation trusts in particular identified numerous opportunities for expanding their income through increased activity. Excessive confidence in both the attractiveness of their services and their ability to grow the business was coupled with a poor appreciation that in a market economy there were going to be losers as well as winners.

Hubris played its part. Negotiating huge, expensive and complex capital and operational programmes and public-private partnerships was simply outside the ability of too many of the managers involved in drawing up the schemes. Some demonstrated poor commercial and financial judgement, while an adversity to risk perversely had the effect of locking in additional costs which exacerbated later problems.

These underlying weaknesses were cruelly exposed when the NHS funding flatlined under the austerity programme and downward pressure was exerted on providers through squeezes on the tariffs paid for services.

One trust which got carried away with PFI and paid a heavy price was Peterborough and Stamford NHS foundation trust. A coruscating report by the NAO in 2012 concluded that: “The trust board’s poor financial management and procurement of an unaffordable PFI scheme have left [it] in a critical financial position. The board developed and enthusiastically supported an unrealistic business case built on overoptimistic financial projections.”

At completion the trust’s total liabilities were £411m. In 2011-12 it had to pay out £41.6m, pushing its deficit that year to a staggering £45.8m.

The Peterborough case highlights a second problem – the failure of the oversight system. Regulator Monitor believed there was a serious risk of the proposed scheme becoming unaffordable, but it lacked the power to stop the trust going ahead and failed to persuade the Department of Health to block it. The treasury relied on the DH’s assessment, so the scheme was approved. According to the NAO, Monitor was then too slow to act when the trust started to slide into difficulties.

NHS trusts and the crippling burden of PFI | Letters Read more

But it is not just the cost of PFI that is the problem; the inflexibility of the operating contracts makes it difficult for trusts to adapt their building use, just at the time when many are looking for new ways to run services. A decade ago Partnerships UK – the quango then responsible for furthering public-private partnerships – was already highlighting the problem of PFI deals giving hospitals and schools too little flexibility in adapting to changing ways of providing services and coping with technological developments.

In the search for solutions, Northumbria healthcare NHS foundation trust and Northumbria county council came up with the novel idea of the trust terminating its PFI contract by borrowing £114m from the council, which in turn got the money from the Public Works Loan Board. The deal is saving the trust more than £3m a year. Government and local authorities need to find more answers like this.

PFI’s critics, including Corbyn and trade unions such as Unison, have largely been proved right. Many of the deals would have been unsustainable even without austerity. They were too expensive, too inflexible and built on excessive optimism.

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