New analysis from the Centre for Health and the Public Interest (CHPI) reveals the significant impact of inflation on NHS trusts with PFI schemes, with large profits and dividend payments continuing to be made by PFI companies. It refines, updates and augments an earlier analysis carried out in 2017, which showed that £831m had been made in pre-tax profits out of the 107 PFI companies set up to deliver NHS projects between 2010 and 2016.

According to the latest report, the estimated increase in the costs of annual PFI payments for NHS trusts, as a result of the jump in inflation for the two years 2022-23 and 2023-24, stands at £470 million. This spike in costs is because payments to PFI companies are, in a large number of cases, contractually pegged to the retail price index (RPI) – the higher measure of inflation in the UK.

The Private Finance Initiative was first introduced in the UK in 1992 across a range of public services, including schools, hospitals, roads, transport, and defence.

Under PFI, a hospital trust contracts with a consortium of private companies that have set up a specific company, known as a special purpose vehicle (SPV), to run the contract. This company borrows money, contracts with a construction firm to build the hospital, and usually contracts with another company to provide ancillary services for the hospital, such as cleaning, catering, portering and building maintenance.

Individual NHS trusts make annual payments to the PFI company over the course of a defined period, averaging 31 years but which can be as long as 40 years. These annual payments, known as a unitary charge, are allocated by the PFI company to cover the cost of building the hospital; the cost of running the hospital and providing ancillary services; the costs of building maintenance; the interest repayments on the loans; and any tax the PFI company pays on the profits it makes from the contract.

Impacting services

Barts Healthcare Trust in London, which has the largest PFI scheme in the UK, has seen its annual PFI payment costs rise from £120m in 2019-20 to £150m in 2023-24.

University College Hospital in London, which has seen its unitary charge payments increase by £16 million over the past two years, stated in its most recent annual report: “As in 2022-23, exceptional inflationary pressures, particularly in the energy markets and in relation to our PFI costs, continue to present significant financial risk into 2023-24.

“In addition to this, our PFI costs, including interest payments of £40m each year, continue to rise in line with the retail price index each year, currently running at over 13.5 per cent, which is well in excess of the inflation that UCLH is funded for, despite some additional inflation funding being provided.”

In general, asserts the CHPI report, the index linking of unitary charge payments to RPI is impacting the ability of some trusts to balance their books and provide healthcare services for their local communities.

The CHPI analysis also shows that PFI company profits for 99 NHS contracts totalled £1.9 billion between 2004 and 2021, with an additional £1.07 billion paid in dividends payments. Large sums to the tune of £47.6 million have been paid out by NHS trusts as part of these contracts to cover the directors’ fees for these companies. The CHPI carried out a separate analysis of ten of the most profitable schemes and identified that the interest payments made on seven of these loans totalled £131.2m between 2004 and 2022.

The CHPI recommends policymakers examine the debt and finance structures of these PFI contracts to ensure that further excess profits are not being generated as a result of the recent rise in inflation.

The report, ‘PFI: Profiting from inflation? Understanding the impact of inflation on the affordability of NHS PFI contracts’, is available on the CHPI website.