- guardian.co.uk, Sunday July 4 2004 16.27 BST
A select group of City banks and building firms have reaped more than £170 million in windfall profits from building four flagship hospitals under the government's controversial Public Finance Initiative policy, The Observer can reveal.
The disclosures sparked outrage from unions and backbench MPs who described it as a 'public scandal'. They have demanded an independent inquiry into PFI, under which private firms are used to develop public buildings such as hospitals, schools and prisons.
An Observer investigation has discovered that while new hospitals struggle with mounting debts and building faults, private contractors reap huge financial rewards using sophisticated methods to 'refinance' the original PFI deals.
A little-known London investment firm run by Labour-supporting South African businessman David Metter has made £50m in just over two years from renegotiating the terms of loans on three hospitals it helped to build for the NHS.
Metter's firm, Innisfree Group, recently clinched a deal to refinance the Princess Royal University Hospital in Bromley, south London, which was built in March 2003. Less than 12 months after the hospital opened its doors, Metter's firm, together with building group Taylor Woodrow, renegotiated the funding of the project and pocketed £43m in clear profit between them. The hospital has already suffered power blackouts and had problems with its telephone systems.
Financial institutions such as Innisfree and Barclays make their windfall profits by taking advantage of favourable market conditions to obtain better terms for the loan they secured to develop the hospital in the first place. It is similar to a houseowner remortgaging a property on a lower interest rate and getting a huge lump sum.
It was intended that hospitals would receive at least 30 per cent of the 'refinancing' spoils, but in reality this can be as little as 10 per cent. Last month, The Observer revealed how Innisfree, Laing and Serco split a £100m profit from renegotiating the deal on Labour's flagship Norfolk and Norwich University Hospital. While the companies demanded their profits in a lump sum, the hospital trust was awarded a reduction in its rental costs of £3.5m a year over the next 32 years.
Despite such profits for the developers of the hospital, a building flaw risked a major public health disaster. Two isolation rooms designed to treat patients with highly contagious diseases such as tuberculosis and Sars were not operational for almost three years. A nurse discovered air ducts that were supposed to ensure contaminated air from the rooms was extracted into a safe place were not completed and risked pumping lethal bacteria into public areas. The hospital is suffering from a multi-million pound deficit and is in dispute with the contractors as to who should pay for the £80,000 repairs.
Innisfree was also behind the refinancing of the £122m Dartford and Gravesham hospital, which saw the private consortium behind the project carve up £33m in windfall profits. Shortly after the opening, the chief executive was sacked after the new hospital failed basic standards on hygiene, trolley waits, cancelled operations and breast cancer referrals. The fourth hospital where private contractors have made a windfall profits is the £66m Royal Calderdale in Halifax, West Yorkshire, developed by Bovis and Lendlease. While the hospital is facing financial problems, the firms made a £12m profit. The Calderdale had been beset by problems including power cuts, exploding glass awnings and rodent infestations.
Metter, who made £700,000 last year from Innisfree, is chairman of the PPP Forum, a campaign group set up to lobby the government for more PFI deals in all areas from schools to roads. He defends the profits his firm and others have made from the deals. He said: 'The private sector took on all the risk of building these complicated projects. Profits are a reward for those risks and we are sharing them fairly with the government.'
Metter claims that PFI has helped to deliver first-class hospital accommodation on time and on budget. But former minister Michael Meacher commented: 'PFI is the great public scandal of our time and the refinancing of these deals, revealed today, makes a mockery of anybody who believes they present value for money for the taxpayer. They are easy pickings for those in the City.'
The public sector union Unison is to publish a report this week condemning the PFI policy and the secrecy surrounding the deals. General secretary Dave Prentis said: 'Private finance is an expensive form of public borrowing that drains scarce public service budgets. While hospitals, patients and taxpayers suffer, those in the City appear to be getting richer.'
But it is not just refinanced PFI hospitals that have faced problems. The first PFI hospital opened by Tony Blair, the Cumberland Infirmary in Carlisle, has suffered a number of crises, including reports of raw sewage being discharged into operating theatres and unbearable heat.
The Edinburgh Royal Infirmary has faced a catalogue of blunders, including the building of operating theatres without the proper lights. Research by Dr Matthew Dunnigan and Professor Allyson Pollock from the public health policy unit at University College, London, into the Edinburgh hospital which was published in the British Medical Journal , found that the so-called 'PFI effect' had led to a 24 per cent reduction in beds and other service cuts in the Lothian area.
According to a report by London Health Emergency, a campaign group investigating PFI deals, trusts are having to close wards to ensure they meet the high costs of rents to the private contractors. Four years after the £93m Queen Elizabeth Hospital in Greenwich, south London, was built, it has had to close a ward to save money towards its £6m deficit, adding 600 more patients to its waiting lists. The more recently opened West Middlesex Hospital in Isleworth, west London, has announced that a ward will close at the end of March and staff will be redeployed to save money towards the trust's £2.5m deficit.
A Department of Health spokeswoman dismissed many of the criticisms as coming from people with vested interests who are politically hostile to private sector involvement in public services. She said: 'PFI has its critics. But the facts speak for themselves. PFI deals have helped to deliver the biggest hospital-building programme in living memory, with over 100 new hospital schemes to be opened by 2010, bringing extra capacity and services to the NHS.'
