The National Health Service (Private Finance) Act 1997 (c 56) enabled NHS trusts to borrow money or rent out property in loan agreements with the private sector, to expand their facilities or build new buildings. As it enabled a major kind of private finance initiative, it has been highly controversial.
The Act was introduced by the New Labour government, following the 1997 general election. While the Private Finance Initiative (PFI) had been launched in 1992 under the John Major administration, its application to the NHS was stalled due to legal uncertainties regarding the statutory powers of NHS trusts to enter into long-term binding contracts with private consortia.[1]
The 1997 Act "removed any element of doubt" for private lenders and banks by explicitly granting NHS trusts the power to enter into "externally financed development agreements."[2] This legal clarification allowed for the first major wave of PFI hospital construction, with 14 new acute hospitals approved immediately following the Act's passage.
(1) The powers of a National Health Service trust include power to enter into externally financed development agreements.
(2) For the purposes of this section, an agreement is an externally financed development agreement if it is certified as such in writing by the Secretary of State.
(3) The Secretary of State may give a certificate under this section if—
(a) in his opinion the purpose or main purpose of the agreement is the provision of facilities in connection with the discharge by the trust of any of its functions; and
(b) a person proposes to make a loan to, or provide any other form of finance for, another party in connection with the agreement.
Impact and criticism
The Act facilitated a shift in NHS capital funding. By 2001, approximately 85% of major NHS capital projects were funded through PFI rather than traditional public procurement.[4]
While proponents argued that PFI allowed for the rapid modernisation of crumbling hospital infrastructure without an immediate increase in public borrowing, critics pointed to the long-term financial burden. Analysis suggested that the cost of private borrowing was significantly higher than Treasury rates, and that the long-term "availability payments" made by NHS trusts to private companies created a rigid "off-balance-sheet" debt that could squeeze clinical budgets.[5]
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