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Labour's Loony Spending Schemes Crippling the NHS.
by John de Roe.

The nation was given a laugh when David Laws, treaury minister for the incoming conservative / lib dem coalition government revealed his Labour predecessor had left a note saying There is no money. it does not seem so funny now as the true extent of Labours financial profligacy is being discovered. The private finance contracts some NHS Health Trusts were tied into are crippling local hospital trusts financially

Labour's Loony Spending Schemes Crippling the NHS.
by John de Roe.
2010-08-23
CREATIVE COMMONS: Attribute, non commercial, no derivs.
KEYWORDS: health,hospital, hospitals, medical, PFI, finance, NHS, money, government, conservative, Labour, coalition, private, public, ppp, investment, economy, economies

The NHS in England faces a total bill of £65bn for new hospitals built under the private finance initiative (PFI), according to figures quoted by BBC news. That is not £65 billion for building new hospitals but £65 billion a year for renting fully serviced hospitals from private contractors.

This annual bill, the "NHS mortgage" as some people call it means that for some local healthcare trusts annual repayments take up more than 10% of their turnover. Public Accountants have said the fees, which rise each year, would make it harder to achieve necessary savings while senior medical said the situation would result in less money being available for patient care. But government sources insist the 103 schemes were providing value for money.

It may be that health and finance ministers in the coalition are reluctant to appear to be blaming the previous government for all the nations difficulties rather than trying to solve the problems or the case may be that the coalition were saddled with binding contracts by the irresponsibility and lack of business acumen that afflicted Labour in all spheres of government. Either way it is simply unbelievable that any finance expert would judge these Private Public Partnership Private Finance Initiatives are providing value for money services to the taxpayer. More likely they would be seen as a licence to print money for the private finance investors willing to underwrite Labour's spending plans in deals that would guarantee returns of many times the original investment.

Private Finance Initiatives (PFIs) were devised by the Conservatives but never really took off until 'New Labour' won power. In the days in which public policy was dominated by concerns about the size of the public sector or the public sector borrowing requirement, the PFI was seen as a means of funding public sector capital needs, but defining this as private rather than public debt. Both Conservative and Labour governments used PFI to mask the expansion of public debt and the true extent of the state's indebtedness to financial institutions.

The people who devised PFI were among those deluded academics and politicians who believed economies could keep growing forever driven by constantly increasing consumer spending. Constant growth in the economy would lead to constantly increasing affluence in the population and constantly increasing tax revenues for government. This constant growth would enable society to cover the ever mounting costs of this political subterfuge. The obvious analogy for PFI is a mortgage where you initially think it is affordable on the optimistic basis of short-term growth in personal income, but then disaster strikes, income growth collapses and repayment becomes an insurmountable challenge.

PFI contracts are very detailed, providing not only for the construction of new hospitals and schools but also for their maintenance, cleaning and other services. Some of these contracts cost several million pounds to draw up and, once agreed, tie contractors to often onerous payments for 30 years and more. Furthermore, they include clauses facilitating the passing on of costs to the NHS when, for instance, national standards of cleaning or safety change. A parallel in business is a company that rents serviced offices in which not only the floor space but the utilities, janitorial services, office furniture, security and administrative functions are provided by the building's operator. If the company then outsources other functions such as IT, accounting, distribution, manufacturing and sales it can become a virtual company, a management team running a business in which everything else is done by third parties.

That is fine so long as the company keeps growing. The problems set in when adverse trading conditions are encountered and revenue is squeezed. All the services still have to be paid for and suppliers have to cope with cost inflation. The virtual company finds reducing overheads difficult because it is tied in to long term contracts.

Now the National Health Service faces declining real income. The government may give assurances that the health budget is ringfenced but in the face of falling tax revenues and rising benefits how solid is the fence? The NHS will have to pay increased VAT and national insurance rates just as any other business would. That the budget is ringfenced does not mean it has to be increased. Inflation will erode the value of money granted by the ministry to each health trust. Cuts in local authority spending may mean social care funding will have to be augmented by transfers from the NHS to council budgets. If this does not happen, "bed blocking" will reduce hospitals' capacity to manage increasing patient demand. Last week it was announced that £500m will have to be transferred from NHS to social care funding in the current year.

The consequences of these cost pressures for hospitals built on PFI contracts are that those hospitals now face significant financial pressures. In principle this should not be a problem as PFI was promoted as a mechanism to increase NHS efficiency or value for money. This was despite it obviously being cheaper for government to borrow on capital markets compared to contracting private organisations to build, own and operate hospitals and other services.

How the "efficiency" gains of PFI are achieved remains unclear, partly because the contracts are "confidential" thus it is impossible to offer a critique of how they work and how money is distributed and accounted for. In the absence of an auditors quantification of the alleged gains, probably as illusory as the toxic assets banks traded in before the financial crash. Which leave us with little choice but to assume PFI schemes were really never anything more than a licence for the private sector to pocket taxpayers money.

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