Last month, we revealed that NHS trusts still owe £21bn to private firms through private finance initiative (PFI) hospital deals.
Ahead of the government’s decision on whether it will revive the policy of involving private finance in plans for the future of the NHS, (in fact The Treasury released an announcement on 25th November 2025 saying it will) we have published posts explaining why PFI was scrapped and how the construction industry has been lobbying for it to return.
In the process, we’ve received plenty of questions about PFI, some of which we’re going to tackle below.
- Isn’t PFI just like a mortgage?
It is tempting to see PFI as akin to a mortgage. Rather than paying for a hospital outright, PFI allows the government to pay for it in installments over 30 years, the argument goes.
The analogy is misleading because PFI contracts are far less flexible and far more expensive than a mortgage.
When a housebuyer takes out a mortgage, they repay the capital cost plus interest. Those repayments are influenced by the Bank of England’s base rate, meaning they can rise but also fall over time, potentially allowing the mortgage holder to reduce their costs by refinancing.
But under PFI, the financial arrangement was completely different.
The NHS trust would sign a long-term contract with a special purpose vehicle (SPV), a consortium typically made up of a construction firm, a bank and a facilities management company.
The SPV would then raise the money to build the hospital from private lenders and equity investors. Once construction is complete, the trust does not own the building but instead makes annual ‘unitary charge’ payments for 25 to 30 years.
Those payments are far more than the cost of construction. They include dividends for the SPV’s shareholders, the cost of maintaining and renewing the building over the life of the contract, and services such as cleaning, catering and security. These costs are indexed to RPI, a measure of inflation that is typically higher than CPI.
While homeowners can often refinance their mortgages when interest rates fall, PFI contracts offer the NHS very limited ability to reduce their financing costs. Even when refinancing occurred, most of the savings went to private investors rather than the public sector.
In addition, the returns required by private equity partners and lenders were locked in from the start, meaning trusts faced a consistently high cost of capital.
What does that mean in practice? Take University College Hospital, a teaching hospital in London built and managed by a PFI company, which opened in 2005.
University College London Hospitals NHS Foundation Trust signed a contract running until 2040 with the SPV. The capital cost of building the hospital was £283 million. By 2012, the trust had already paid the SPV more than £300 million in unitary charges, according to the government’s PFI dashboard.
Today, the trust still has fifteen years left on the contract and estimates it will pay a further £1.6 billion, according to its accounts.
No one would take out a mortgage on those terms.
As one Private Eye journalist once put it: building hospitals with PFI was like taking out a mortgage on a credit card.
- What happens at the end of PFI contracts?
When a PFI contract ends, the SPV is supposed to transfer the hospital back to the NHS without additional cost and in good condition.
But the process is not as straightforward as it might seem.
The National Audit Office (NAO) has warned that public bodies risk getting shortchanged by the private companies which own PFI contracts because they lack the expertise and resources to manage the handover.
There is a strong financial incentive for PFI companies to cut back on maintenance in the final years of a contract, the auditor found. That’s because they get to keep any public money they avoid spending on repairs once the contract ends.
One NHS trust told the auditor that it believes its PFI owner is sitting on funds that should be used for maintenance but it can’t challenge the company because it has no right to demand to inspect its books.
If when the contract ends, the hospital still has major outstanding repairs, the NHS trust has limited options for recourse. If it’s not careful, it could end up having to pay again to fix the building.
The power dynamic is heavily weighted in favour of the private companies. EveryDoctor found that the five largest PFI investors hold half of all NHS PFI contracts. That means investors often have more resources than individual trusts to manage the end of contracts in their favour.
A quarter of public bodies with PFI contracts consider they lack the necessary in-house skills to manage the handover and 60% are planning to hire external consultants to help them, a survey carried out by the NAO found.
- How can we get out of PFI contracts?
Getting out of PFI contracts is not easy. Public bodies can only terminate their contracts without incurring significant penalties if they can demonstrate serious failings have occurred. Even then, a lengthy court battle is likely.
For example, Tees, Esk and Wear Valley NHS Trust terminated its contract with a PFI company after serious defects were found in a hospital it built in 2011. The trust won a court case challenging the move in 2016, but with significant legal costs.
One alternative would be to buy out PFI contracts, but that would require compensating private shareholders – which is exactly what Northumbria Healthcare Foundation Trust did in 2014 using a loan of £114m.
The loan was provided by Northumberland County Council, which in turn borrowed money from the Treasury’s Public Works Loan Board. At the time, the trust said it would save £3.5m a year over the next 19 years by terminating the contract early.
However, the cost of public borrowing has since increased significantly and there is no guarantee that early termination will prove to be value for money because it’s difficult to predict changes in inflation and interest rates.
The Centre for Health and the Public Interest has proposed several other options including better enforcement of contract performance, moving costs from local trusts to central government, imposing a windfall tax on PFI companies, and nationalising PFI companies. The latter would face significant political and legal obstacles, the think tank warns.
- What are the alternatives to PFI and why weren’t they considered?
As we previously detailed in our brief history of PFI, it’s important to consider that the scheme was above all a political choice.
Most of the assumptions made by New Labour ministers in the 1990s about the cost and efficiency benefits of PFI over more traditional means of funding new infrastructure, were later found to be misplaced.
Two decades later, a review by the National Audit Office, found no evidence that hospitals run by PFI companies were any more efficient than publicly run equivalents. If anything, the costs of services, such as cleaning, were often higher.
While the auditor found some evidence to suggest that PFI projects were less prone to cost overruns, it noted that the majority of projects tended to be less complex and construction prices were higher.
Similarly, while trusts tended to spend more on maintenance costs in PFI hospitals, the NAO found that this was because they were contractually obliged to. Ringfencing maintenance funds could achieve the same outcome without the use of private finance, it noted.
What it did find is that the costs of schools and hospitals built using PFI were 40% and 70% higher respectively than if they were financed by government borrowing.
Before PFI, major infrastructure projects were commonly financed through the Public Works Loan Board, which allowed public bodies to borrow directly from the Treasury at relatively low interest rates and then own the assets outright.
So why was PFI so attractive? Simply, because it allowed successive governments to spend without appearing to do so.
When the government borrows money to build a new hospital, it appears on its balance sheet. But when a local NHS trust commissions a PFI company to build one, it only appears on the trust’s accounts. That means that the investment is not recorded as public spending even though taxpayers are ultimately paying over the odds for it in the long-term. What might be the alternative? In our current era of high government borrowing costs and inflation, it is not easy to say. Some, like the New Economics Foundation think tank, have made the case for a rise in general taxation or a review of the government’s self-imposed fiscal rules to fund new infrastructure.
We’ve been raising the alarm about private financing since the Ten-Year Plan was published, and the past months of research have only reinforced why those concerns were justified. But we’re not powerless. The more people who understand the real impact of PFI, the harder it becomes for the government to push through policies that damage our public NHS. We’ll keep providing clear, evidence-based information and together, we can make sure the voices of staff and patients are heard.
