The great PFI heist: The real story of how Britain's economy has been left high and dry by a doomed economic philosophy

Sir Howard Davies, chairman of the Royal Bank of Scotland (RBS), recently made an astonishing admission on BBC1’s Question Time when he stated that private finance initiatives (PFI) had been a “fraud on the people”. Beyond seemingly populist rhetoric, the real story of PFI reveals that RBS alongside other global banks, notably HSBC, were instrumental in what Sir Howard has effectively labelled a great heist.

The past month has seen the demise of construction giant Carillion followed by the collapse of Capita’s market value: both firms having built huge empires by providing outsourced services to public authorities. These initial tremors might be the canary in the coal mine. Profit warnings have been issued for other government contractors, such as Interserve. The domino effect has shades of the 2007-08 financial crisis even though it is clearly not of the same magnitude.

All this has thrown up searching questions, not least around staff redundancies and pensions, bailouts, inflated dividends and executive remuneration.

Yet even in the throes of this PFI and outsourcing crisis, public-private Partnerships (PPP) are far from dead and buried. On the contrary, the Naylor Review – a report recommending the disposal of NHS land and assets to generate investment – is rehabilitating PPP.

Furthermore, the Government is pushing through Accountable Care Organisations (ACO), a form of PPP based on an American model of healthcare. The Government cites too the model of Alzira in Spain where a consortium of private companies not only financed and built facilities but also delivered health services.

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Of course, PFI was not always a toxic brand. In 1997 it appeared to be New Labour’s magical solution to chronic underinvestment in public services in the wake of Thatcherism.

As Alan Milburn – the former Labour Health Secretary described by Private Eye as an “almost maniacal convert to PFI” – put it: “It’s PFI or bust.”

The argument went that Labour had inherited public services in such a diabolical state of neglect that there was no alternative to the private financing of whole swathes of infrastructure.

It was a persuasive argument which seduced many. The Blairite Third Way would somehow square the circle by delivering new schools, hospitals, roads, railways and prisons without the debt or inefficiency of the public sector. It seemed too good to be true yet those who dared to question the orthodoxy du jour were swatted away.

As early as 1999, Richard Smith, editor of the British Medical Journal, denounced it as “PFI: Perfidious Financial Idiocy” in an editorial revealing that repayments would be exorbitant. In the same year, Professor Allyson Pollock and colleagues published a paper sounding the alarm over the potentially disastrous consequences of PFI debt and the financialisation of public services. And in a 2004 long read for Private Eye the late Paul Foot exposed the seedy underbelly of its history.

Now the unheeded prophecies of the Cassandras have come true.

It later transpired that the process of bringing in PFI had not exactly been transparent. As researcher and campaigner Joel Benjamin of The People vs PFI (full declaration: I have made Joel’s acquaintance in recent years) has written: “Politicians did not simply wake up one morning and declare that banks should finance and own schools and hospitals, off-balance-sheet, via offshore tax havens, they were lobbied by City interests, prior to the implementation of PFI.”

A PFI panel was set up by Chancellor Ken Clarke as early as 1993. It mutated into a taskforce inside HM Treasury and was eventually rebranded as Partnerships UK. Various executives from big banks appeared on secondment. It was later privatised with the shares sold off to financial institutions including Barclays, HSBC and RBS.

For a golden period, Gordon Brown’s apparent vanquishment of boom and bust kept any problems in check. But when the financial crisis was followed by the diktats of austerity, PFI began to unravel. South London Healthcare Trust became the first NHS trust to go bust in the summer of 2012, having found itself on the hook for huge PFI costs.

The total bill for NHS PFI hospitals is ultimately projected to rise above £79bn, way in excess of original build costs of £11.4bn.

Many PFI contracts came with strings attached, “facilities maintenance” often subcontracted on a long-term basis as part of the deal. As a result, only specific contractors are allowed to change or fix certain equipment or fittings, such as a plug socket or a light bulb. A Daily Telegraph investigation flagged up several egregious examples but this one really stood out: one hospital was charged £52,000 for a job which should have cost £750.

What’s more, PFI payments have been indexed higher with each successive year regardless of a hospital’s revenue. Total UK PFI debt for the taxpayer is over £300bn for infrastructure projects with a value of £54.7bn. To put it into perspective, the PFI debt is four times the size of the budget deficit used to justify austerity. PFI, it could be said, underlines that austerity is a political choice rather than a necessity.

To look at it another way, a quick calculation reveals that the outstanding PFI payments would cover the pay for all the nurses, full-time consultants and GPs for 10 years. There would still be plenty left over to cover the training of the next generation of surgeons and build 80 state-of-the-art hospitals. If you wanted to keep it simple then the PFI debt would cover the entire NHS budget for over 2 years.

Across the NHS, PFI repayments have contributed to hospital mergers, closures and downgrades. Long-time critic of PFI Professor Pollock argues that these mergers will be followed by the final “wave of closures in the run-up to privatisation and franchising out”. She astutely points out the great irony that PFI was once hailed as the largest NHS hospital-building programme; in fact it is likely to end up becoming the largest hospital closure programme.

Innisfree – a fund management company in the City of London – is amongst the biggest players in the PFI market. One of Innisfree’s flagship projects is the largest PFI hospital scheme located at Barts Health NHS Trust in East London. In fact, this PFI consists of two schemes. As one comes out of Whitechapel Tube station, the new Royal London hospital certainly looks impressive. Its glistening blue tower is emblematic of an ultra-modern 21st-century NHS. It looms over the ruins of the crumbling Victorian hospital made famous in David Lynch’s film The Elephant Man. Up and down the country, this is the slick, corporate sheen of PFI hospitals.

Inside, the first impression is that it is state of the art. Yet there is also an aesthetic and functional brutalism with labyrinthine corridors and sunless, windowless rooms. There are fewer junior doctor offices and overnight rooms. Intriguingly, PFI hospitals have been designed with significant numbers of individual rooms as opposed to conventional wards. This is clearly beneficial for patients and reduces the risk of transmission of infections. However, it suggests that privately financed hospitals are potentially anticipating something else – the expansion of private healthcare.

The original cost of the project was £1.1bn. However, repayments will reach £7.1bn by 2049. Chairman of Imperial College Healthcare Sir Richard Sykes has previously pointed out that Barts Health is paying over £100m in interest a year before they see a single patient.

Barts Health eventually ran into financial dire straits and was put into special measures by the Care Quality Commission in 2015. Its restructuring entailed redundancies for hundreds of staff and down-banding of others. Since I completed my GP training in Tower Hamlets, services have disappeared at an alarming rate. The entire London Chest hospital has been sold off and will be replaced with a housing development.

Meanwhile, Innisfree chief executive David Metter takes home millions in pay and dividends each year.

The majority shareholder in Innisfree is Jersey-based Coutts & Co, which in turn is part of the RBS group. RBS was the biggest bank in the world by assets when it failed in 2008. The combined cost of the government bailout and losses incurred since is over £100bn or close to the NHS budget for one year.

Banking leviathan HSBC also has a stake in PFI hospitals. It has even been described as owning outright three NHS hospitals. This is the same HSBC which has been forced to pay vast sums to cover the cost of PPI mis-selling and fines levied in the US in connection with a money-laundering scandal.

Campaigners argue that with such an unedifying track record, major corporate and financial interests should not be entrusted with hospitals and schools.

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Sure enough, there is some evidence of the tide turning.

Haringey Council’s public-private partnership with construction and property giant Lendlease appears on the brink of collapse after Labour’s National Executive Committee intervened.

Similar schemes across London and the country have been plagued with controversy. Jeremy Corbyn hailed the potential halt of the Lendlease scheme as a victory for municipal socialism, with top-down progressive leadership combining with bottom-up local campaigning to deliver a rare victory for citizens over what are often deemed to be unaccountable corporate interests.

All in all, fundamental questions are finally being asked about the nature of PFI contracts.

Indeed, the National Audit Office has recommended that the Government should have the power to cancel contracts which are not providing value for money. After all, while there have been exceptional cases in which hospitals have bought out PFI contracts this is not feasible for larger PFI deals, such as that involving Barts Health, without the backing of government.

There are many precedents for renationalising privatised services when it is in the public interest. The London Underground public-private partnership saw the bankruptcy of private company Metronet, with the Government forced to step in and bring the upgrade back into public hands.

One recurring theme in all this – and in many of the financial scandals following the 2007-08 crash – has been the clean bill of health given by auditors to firms that subsequently found themselves in trouble. Sue enough, the big four accountancy firms, EY, KPMG, Deloitte and PwC, were present at the inception of PFI. And it now looks like they might be brought in to administer the last rites. Inevitably, this raises pressing questions as to what kind of resolution might emerge when there are so many entangled vested interests.

PFIs are complex, financial instruments and the answers to how they might be brought to heel – or cancelled – need to be carefully thought out. Simply centralising the debt might still mean taxpayers forking out billions as profits for PFI consortia. PFI companies are already arming themselves for the prospect of a Corbyn government, as has been recently reported. John Laing Infrastructure Fund (JLIF) updated shareholders that it would expect 86 per cent of the value of its PFI contracts to be compensated in the event that they were taken back into public ownership. This figure may certainly prove to be questionable.

Furthermore, the catch-all of commercial confidentiality has erected a firewall. Professor Pollock tells me that contracts have to be made transparent in order to be scrutinised. Ultimately, though, the fiat of government legislation is sufficient to overhaul PFI. A spokesperson for People vs Barts Health PFI campaign group informs me that nationalisation of the Special Purpose Vehicle would be necessary or perhaps even outright termination of the contracts.

However this plays out, it looks like the stage is set for the final act of the PFI story.

‘How to Dismantle the NHS in 10 Easy Steps’ by Youssef El-Gingihy is published by Zero Books