The biggest PFI disasters: Bankrupt hospitals and billions in debt

PFIs have become a tainted brand due to the exorbitant bills that public bodies have been handed, and there are questions around the effectiveness of the scheme in the first place.

Alex Salmond’s SNP scrapped PFIs in Scotland upon taking power in 2007, with the then first minister describing it as a “costly mistake”.

The Tory-run UK government followed suit in 2018, with then chancellor Philip Hammond telling MPs: “In financing public infrastructure I remain committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector. But there is compelling evidence that the private finance initiative does neither.”

When it comes to discussion of “value for the taxpayer” – something which is said to be top of the Labour Government’s agenda with their new “Office of Value for Money” – PFIs can only said to have been a disaster.

The true cost of PFIs

Ultimately, no one knows how much money the private sector has made from PFIs. In 2018, the Treasury refused to calculate the returns investors made from the contracts, telling the Public Accounts Committee that the cost of fulfilling a request for the data would be too high.

But we do have some idea of the scale of the profits that are being made thanks to data from other sources.

In 2018, a National Audit Office report said: “Future payments for existing projects are forecast to total £199bn from 2017-18 onwards – an average of £7.7bn a year over the next 25 years.”

It had noted: “There are currently 716 PFI and PF2 projects either under construction or in operation, with a total capital value of £59.4bn.”

READ MORE: What are the pros and cons of PFIs – and why would Labour bring them back?

The following year, 2019, the Institute For Public Policy Research think tank published a report focused on the NHS. It concluded that “for just £13bn of investment, the NHS has been landed with an £80bn bill”.

The NAO report had said that, for the £13bn of capital investment, the Health Department paid out £2bn in fees in 2016-7. That has been projected to rise to £2.5bn in 2030.

While it is hard to get a complete picture, one report in The Telegraph has claimed: “The total of PFI payments from 1996/97 up to the final transaction due in 2052/53 is £278.3bn, an astonishing 555pc of the £50.1bn capital sum.”

However, this quoted capital sum is £9.3bn less than the £59.4bn quoted by the NAO in 2018, suggesting that the sum of completed payments may also be higher.

Whatever the true figures, the costs that public services like the NHS are having to pay due to PFI contracts have been disastrous.

Scotland’s PFI headache

In a standard PFI contract, a private firm will build, manage, and operate an asset for around thirty years while being paid fees. At the end of the contract, the ownership of the asset will move to public hands.

However, the BBC reported in 2023 that this is not the case for at least 11 PFI-funded projects across Scotland. When the contract ends, public bodies will need to buy the building for as much as market value – despite already having paid out over decades.

Key infrastructure including the Royal Infirmary of Edinburgh, Wishaw General in Lanarkshire, five high schools in Falkirk, and two Scottish Water waste plants were on the list of affected projects.

The Royal Infirmary of Edinburgh was built with a PFI deal (Image: PA)

Furthermore, analysis from The Express found that 34 projects north of the Border had been signed off under Labour between 1998 and 2007 to build or renovate Scottish schools.

In total, those 34 projects had a capital value of £3bn, but payments for the contracts – over 33 years – would total £13bn.

The issues were highlighted when, in 2016, 17 schools in Edinburgh built under PFI contracts had to be evacuated after a wall collapse that a probe concluded could have killed children – and only didn’t due to “timing and luck”.

Construction expert Professor John Cole said the Edinburgh collapse took place four years after three almost identical defects led to similar incidents at other schools across Scotland – but the PFI firms involved took no action to ensure other buildings weren’t affected.

The issue with lack of oversight has not gone away. In March, Pinsent Masons infrastructure expert Stuart Barr said of PFIs in general: “Some authorities complain of a lack of active project management by project companies and even allege mis-reporting asset condition and maintenance.”

Carillion

In 2018, Carillion collapsed. The UK’s second largest construction firm, it had a network of PFI contracts worth billions.

As two experts on PFI – accounting Professor Iqbal Khadaroo and lecturer Ekililu Salifu – wrote on The Conservation at the time: “The NHS, defence, education, energy, and prisons have all been left exposed by its collapse.”

It left the construction of two hospitals, the Midland Metropolitan and the Royal Liverpool, in limbo and awaiting state intervention, and meant the fire service had to be called in to cover gaps in school meal provision.

A House of Commons report found Carillion’s debts had been spiralling as it paid out more in dividends than it could afford.

“In the eight years from 2009 to 2016, Carillion paid out £554m in dividends, three quarters of the cash it made from operations,” the report said.

“In the five years from 2012 to 2016, Carillion paid out £63m more in dividends than it generated in cash from its operations.”

The mess that the firm’s collapse left for PFI schemes across the country shows a key issue with using private money to fund critical public infrastructure.

The bankrupt London hospitals

In July 2012, three London hospitals – the Princess Royal University Hospital in Orpington, Queen Mary's Hospital in Sidcup, and the Queen Elizabeth Hospital in Woolwich – were put into administration after being declared bust.

The three had been pulled together into one NHS trust – South London Healthcare – in 2009, and inherited a large debt from the PFI schemes used to build the Princess Royal University Hospital and Queen Elizabeth Hospital.

By June 2012, the trust was spending 14% of its entire income servicing debts on PFI contracts.

At the time, an article in the British Medical Journal warned: “More than 20 other NHS trusts are in such serious financial difficulties that they risk following South London Healthcare NHS trust down the pathway of administration and potential bankruptcy.”

The BBC reported the same figure, noting: “The decision to put the trust into administration – a measure made possible by legislation Labour introduced in 2009 – is being closely monitored within the NHS because it provides a blueprint for what could happen elsewhere.”

Sweeping plans to salvage the trust involved new mergers with other hospitals, as well as downgrades to services, and yearly bailouts from the UK Government to cover the PFI costs.

The problem with PFI costs bleeding NHS budgets endured. In 2019, a report from the Institute for Public Policy Research found that some NHS trusts were being forced to spend £1 in every £6 on PFI payments.