When New Labour took power in 1997, health secretary Alan Milburn described the NHS as plagued by “shoddy” buildings, “unreliable equipment”, and “out-of-date” hospitals – the result of years of underinvestment.
Nearly thirty years later, those words might sound familiar.
In a report published after its election victory, the current Labour government concluded the health service has been “starved of capital”.
The bill to clear the maintenance backlog has now hit £13.8 billion.
The parallels don’t end there.
Last month, Keir Starmer’s government confirmed it is considering reviving the controversial New Labour funding model known as the private finance initiative (PFI).
Just seven years after the approach was abandoned, its return would allow private firms to make a profit from delivering NHS infrastructure once again.
Then as now, Labour entered office having pledged to stick to self-imposed fiscal rules that made it politically difficult to allocate enough public money for capital investment.
To avoid breaking those promises, New Labour turned to what was then a financial experiment: getting private companies to build and run new hospitals, in exchange for long-term fees.
In theory, it was like buying a hospital with a mortgage – the government would pay it off gradually, and eventually it would transfer into public hands. In practice, it turned out to be far more expensive.
PFI’s Origins
PFI was first proposed in 1993 by Conservative frontbencher David Willetts in a pamphlet funded by the private health insurer BUPA. But it never quite took off under John Major’s government: the Treasury preferred to keep spending centralised, and private companies saw it as too risky.
Despite this, the idea quietly gained traction among Labour’s shadow ministers. By the time the party came to power in 1997, it proved irresistible. Not only did it fit New Labour’s pro-business instincts, it also offered a way around a financial bind.
Having promised to rein in public debt, the government didn’t want to be seen borrowing heavily to fund new hospitals. That was where PFI came in.
Instead of using public borrowing, an NHS trust would sign a long-term contract with a private consortium, typically made up of a construction firm, a bank, and facilities management companies. The consortium would finance, build and operate the hospital.
In return, the trust would make annual payments over 25 to 30 years, covering construction costs, maintenance, interest on the consortium’s borrowing, and a return for investors.
Those payments would continue regardless of how useful the hospital still was decades later. In effect, the consortium had a guaranteed, government-backed income stream with little risk attached.
Unsurprisingly, this approach ended up costing the government significantly more than if it had simply funded the projects itself. But it didn’t look that way. Because the upfront costs were borne by the consortium, and the contracts were signed by individual NHS trusts, the spending didn’t appear on the government’s balance sheet.
It was, in the words of one Labour MP, who had opposed the plans under the Conservatives, a convenient “financial sleight of hand”.
By 2001, New Labour had signed £4bn worth of PFI contracts. As their number grew, so did the scrutiny. One early study found that the costs of the first PFI contracts for new hospitals were significantly higher than estimated.
At the time, Milburn – still health minister – dismissed the criticism. “Despite what its sometimes vocal opponents say, PFI is a partnership that works,” he told Parliament. “As an addition, not an alternative to public sector capital investment, PFI is helping deliver the biggest new hospital building programme the NHS has ever seen… PFI is here – and it is here to stay.”
The Tide Turns
Over the next ten years, the number of PFI projects ballooned. It wasn’t just hospitals any longer, but also schools, roads and prisons. As the number of PFI projects topped 700, the warnings grew louder. In 2011, a report by the Public Accounts Committee found it was far from clear that PFI offered value for money.
“At present, PFI looks like a better deal for the private sector than for the taxpayer,” it concluded.
Despite this, the Conservative–Liberal Democrat coalition continued with PFI under a revised model until 2018.
That year, a National Audit Office report found that PFI projects cost up to 40% more than if the government had financed them directly.
The final straw only came when the construction firm Carillion, which had built numerous PFI projects, went bankrupt leaving two hospitals unfinished. In October 2018, the then Conservative government announced a moratorium on new PFI deals.
No new contracts have been signed since, but NHS trusts are still saddled with the high annual costs of existing PFI agreements, while capital budgets have remained too tight to fund major new infrastructure.
No wonder, then, that ministers and NHS executives are once again casting around for a magic bullet.
In June, NHS chief executive James Mackey called for the government to introduce an “off-balance sheet capital investment mechanism”, a long-winded way to describe PFI. That same month, the Treasury said it is considering new PFI projects, albeit only for “certain types of primary care and community health infrastructure”.
There’s no confirmation yet. But in British health policy, even the worst ideas rarely stay dead for long.
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