As health campaigners, we’ve been researching and discussing what to do about PFI for several years now. Having the new Royal London on our doorstep, and with struggling Barts Health NHS Trust paying out £2.4m a week in unitary payments to Innisfree and Skanska, PFI is way up our campaign agenda.

But, until now, we haven’t come across a solution we could wholeheartedly support. However you look at it, the most widely-discussed options – renegotiation of the contracts, centralisation of NHS debt and buy-outs – all have serious flaws. But now we think there’s a solution – and it could be applied to all PFI deals, not just in the NHS.

Let’s nationalise Special Purpose Vehicles

If we’re serious about taking back the public sector, we need to challenge the PFI model in its entirety. We could do this by nationalising the companies, known as ‘Special Purpose Vehicles’ (or SPVs), that have been set up to operate the PFI contracts.

Unlike any of the other ‘solutions’ to PFI, this would allow us to take back control over public assets from private finance companies. It would put an end to the securitisation of public assets like hospitals. They could no longer be used to create inflated debt and profits.

What’s wrong with the other proposals?

• Renegotiating contracts: PFI contract holders have no incentive to renegotiate or abandon them. There’s no danger of default through bankruptcy, because PFI debts are guaranteed by the government. By contrast, nationalising the SPVs would cut through many of the contractual difficulties and come without costly renegotiations or buy-outs. Plus, we’d get back control over our public assets.
• Centralising PFI debt: Shifting responsibility for repayments to the Treasury might relieve hospitals in the short term, but it fails to challenge the PFI model or stop new PFI projects. It would leave our hospitals in private hands and other PFI deals, including those for schools, housing and social care, intact. Importantly, there would be nothing to stop the government from selling on the debt – as it plans to do with part of the student loan book.
• Buy-outs: Buying out existing contacts might return assets to the public sector, but a study of the Hexham buyout proves you can end up saving little.

Why target Special Purpose Vehicles?

Special Purpose Vehicles are central to the PFI process. They are set up by the consortium that wins the PFI contract. The consortium typically consists of a construction company and an investment company.

Loans to pay for the PFI project are raised through the SPV: 90% raised through the bond markets (‘senior debt’) and 10% raised as equity loans (‘junior’ or ‘subordinate’ debt’) direct from the equity holders – the companies behind the SPV.

The hospital or other public body pays a regular unitary charge to the SPV, which has two elements.

• The ‘availability’ charge, which repays the debt, the principal, a nominal rent for leasing back the asset and ‘lifecycle costs’ to maintain the value of the asset – around 60% of the unitary charge.
• The ‘service’ charge for services like maintenance, portering, catering and laundry that are bundled in to the contract – around 40% of the charge.

How SPVs profit at our expense

Drop the NHS Debt and People vs Barts PFI have studied the profits made by the main shareholders in the SPVs for The Royal London, Lewisham, Queen Elizabeth Woolwich, Princess Royal and Bromley Hospitals. We found eight ways that excessive profit is being extracted from our frontline services and withheld from the public sector.

1. Equity holders receive 10-15% interest on their loan to the project (while senior bondholders are typically repaid at LIBOR + a given percentage + RPI).
2. They get dividends from any profit made by the SPV. These can be substantial because there’s often a big difference between amount a hospital pays for a service and the amount the SPV pays the contractor.
3. They get various directors’ fees and ‘administration’ charges.
4. They can sell on their equity – with the average annual return running at 29% between 1998-2012. These gains are not shared with the hospital.
5. They can refinance the original 90% to get cheaper loans and are allowed to pocket 50% of the gain. (But, in practice, only half of the gains anticipated for the public sector have materialised, because of the way refinancing has been defined in the code of conduct.)
6. Service providers under the contract make profits – in some cases, providing sub-standard services, while cutting wages and jobs.
7. SPVs benefit from having public bodies locked in to long service and finance contracts, which are hard to break. Just five companies are now sole or major equity holders for more than 50% of the capital value of PFI projects in the health sector.
8. And, surprise surprise, many equity holders and SPVs are registered in tax havens.

PFIs aren’t just bad contracts or examples of privatisation, they are emblematic of the global trend towards financialisation. PFIs are a tool to harness our public assets as investment vehicles for accumulated capital, in order to maximise private profit. If we’re serious about protecting public services like our NHS from the excesses of neoliberalism, surely we have to do more than just pay up in a different way?

How we propose nationalising SPVs

1. An Act of Parliament could nationalise all SPVs as a matter of principle, or a series of Acts could be passed as individual debts became unsustainable. The Act would set out how much it expected payments to reduce.
2. A national body could be created to own the assets of the SPV companies. It could operate like the German government’s ‘Treuhand’ agency in reverse.
3. The national body would:

• pay all dividends and directors’ fees paid back to the public body making the unitary payments
• return any service profits to the public body (or let the service provider keep them in return for higher standards and better wages and working conditions for staff).
• transfer ownership/control of the assets back to the public body, and
• negotiate compensation.

The above would remove every opportunity for future profiteering.

What about compensation?

The amounts of equity invested are small relative to the size of the project. They could be compensated for in full for simplicity and speed. Negotiations on compensation for loss of revenue would take into account the fact that this revenue is a profit on turnover. The senior debt could be compensated through a bond swap – bonds in the PFI loan would be swapped for government bonds.

And furthermore, compensation for the 10% of the total loan provided directly by the equity holders would depend on the amount of interest already paid. A variety of possible ways to offer compensation could be considered.

How we could start to take back services

In addition, to take back services privatised under the SPV, we would favour legislation to set minimum service conditions for all public sector workers – whether employed directly by the public sector or not.

Zero hours contracts would be illegal, levels of training for all cleaning, catering and maintenance staff would be set, and wages should be set at levels where it is possible to live without claiming any benefits. Firms that failed to comply could be compulsorily purchased.

This legislation would make services a lot less profitable. Private service providers might just walk away – an ideal end to a less than ideal chapter in NHS history.

Let’s talk

We hope you will read the full paper, which sets things out in more detail. With the NHS in such dire financial straits and with a new-look Labour Party that has vocal critics of PFI at the helm, we think there has never been a better time to sort out this appalling mess.

We would like to thank Dr Helen Mercer for developing this new approach to ending PFIs, as an active member of People vs Barts PFI and Drop the NHS Debt. Also, Dexter Whitfield for invaluable comments and advice.

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