Tuesday 30 July 2013

The PFI scandal that led to NHS Trusts going bust

I received the posting below as a comment on Natalie Bennett's NHS speech LINK  but I feel it is important enough to be published as a Guest Blog:

What an excellent assessment of the problems facing the NHS, and what needs to be done to protect it! Thank you for publishing this speech, Martin.

I write as someone who was diagnosed with Type 1 Diabetes in my late 20's. My care through the NHS for more than 35 years must have cost a lot of money, but because of it I was able to continue with a relatively normal working life, and pay large amounts of income tax and NIC. That, to me, is the way things should be.

Hopefully, with a newly-diagnosed Type 1 diabetic in the cabinet, there might be a better appreciation of the NHS within government, but I won't hold my breath!

I spent 25 years of my working life as a Tax Inspector, and in the early 2000's had to consider the first accounts of a company which had won a PFI contract to build a small hospital and provide all of its support services for 30 years. I was concerned at the odd accounting treatment of the transaction, which it appeared would guarantee that the company would automatically make losses (for tax purposes)until the final year, when it would make a huge profit. The losses each year would be set against the trading profits of the two large groups which owned the company 50/50 (one a construction group, the other a major services provider).

I asked for a copy of the PFI contract, and other supporting documents, to see whether I could challenge what looked like artificial tax avoidance, and after a lot of delay and prevarication, I eventually received them. The contract was about 150 pages long, and very complex, but effectively meant that the NHS (or hospital trust involved) would repay the £30m capital cost of the building, plus a generous rate of interest on the "mortgage" for this amount, over the thirty years. The company could charge whatever it wanted to (with very little chance of the NHS being able to challenge the amount) for the services provided during the thirty years, with no chance of the hospital renegotiating the contract, finding another provider or taking the services back "in house".

How had the NHS allowed itself to be tied up in such a bad contract? Because of instructions from the government that, in order to encourage private companies to get involved in PFI projects, it would guarantee to pay their legal and professional costs of entering into contracts. So, in the case I was looking at, the NHS had paid £1.5m for the company's lawyers and accountants to draw up a contract which "stitched-up" the NHS and gave the opportunity for tax avoidance by the two big groups behind the PFI company (one of which had a former cabinet minister as its Chairman).

Why were Chancellors Ken Clarke and Gordon Brown so keen on promoting PFI contracts? Because it kept the cost of providing major capital projects "off Balance Sheet" as far as the government's accounts were concerned. They could claim to be providing new hospitals without this being charged against their budget deficit, even though the eventual costs of doing things this way would be much higher (hence NHS Trusts going bust).

I'm afraid that the Official Secrets Act prevents me from identifying the hospital and companies involved, or from disclosing the outcome of my investigation of the accounts, but it was an episode towards the end of my career in the Inland Revenue that left me frustrated by the actions of my "masters" in the Treasury!

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