[oliwarner]

If you're unaware of how tender breaks public services, here's an example.

Hospital needs a new MRI suite. To them, this would cost £2m for the machine, £400k for the room, and £500/h in running cost, £1.4m/year. The first 5 years costs are: £3.8m, £1.4m, £1.4m, £1.4m, £1.4m, ...

But which trust has £4m in their back pocket for y1 cost? Even if they did, it's a large project so has to go out to tender. A capital-investment-backed provider comes back with a flat cost of £2m/year. They might have the additional cost of land but many of these [currently, right now in many hospitals] operate in containers in the carpark. At £2m, they break-even after Y4 and produce £600k a year profit from Y5 for another 11 years. NHS loses £6.6m over 15 years.

And it's not that simple because their £2m bid will be interesting but there'll another for £1.5m at half-duty that will sell operational time to private providers, even direct-to-public (increasingly popular in the UK) at massive markups. They'll break even in Y3. Possibly even quicker if the hospital realises it needs full duty and pays triple-rate to book the machine out.

So the NHS picks a private provider. They make a 5 year saving, and take an 11 year beasting. And at the end of it, or even halfway through it when they discover they need even more capacity, they find out that their old suite is now a support ward. Or managers have moved in, or it's just fallen down. The cost to build a new suite isn't the £2.4m it would have been, it's £4m. To get so assuming we would now need two machines, it's an £8m y1 cost to bring this back in-house.

The long-term budgetary flexibility required to go back to running your own services is staggering and something that is very hard to sell to people not looking at TCO.

[1123581321]

What prevents them from accepting an offer that has economics closer to the in-house funding cash flow? I’m not from the UK so please forgive the question.

Also, since I’m from the US, your example reminds me of Bobby Bonilla Day, jeered at as an awful deal for the sports team but in reality a fair present value exchange for forgoing a large short-term contract. (I realize unit specific numbers are just an example.) Fun recap, analysis and interview: https://www.npr.org/2021/06/25/1010404697/bobby-bonilla-day

[oliwarner]

You mean an offer that delivers an equivalent 15Y cost to buying it yourself? There's no return on the investment. If the NHS had any sense they'd in-house finance brokering; try and thumb the scales towards the raw £22.4m instead of the external £30m, by offering 15y bonds, but spending time on putting together internal bids with external finance for tender seems to be frowned upon.

Publicly Funded Infrastructure is a thing for Big projects, but what usually happens is the people asking for the money are so local and desperate that those with the money call the shots. A recently built nearby hospital has it in their PFI contract that they have to repaint the whole hospital with a specific provider every year for 30 years at whatever number they come up with. I'm not sure if the NHS trust even ends up with the buildings. Many school-improvement projects go through PFI and end up with public land being transferred to private interest. "Give us your old buildings and land, and £50m and we'll build you a new shiny one that's further away that you can rent from us forever." It's the budgetary simplicity that sells these awful deals.

Where it's important to draw the distinction between the NHS and the Bobby Bonilla deal is the UK government can generate money for public capital infrastructure through public debt and taxation. When they need money for war, state funerals, or propping up banks, they just do it and we burden the cost. They could say "We need a dozen MRIs in the next few years", raise some tax revenue, make a bulk deal, and actually make the saving the NHS was designed to make. They could in-house road building, centralise a prefabricated school building factory, employ local government services directly.

But public debt is bad and saving up is apparently somehow worse, and in any way competing with private companies [with deep ties to Ministers] is strictly verboten so we're left bouncing between external private providers and PFI.

Even before the corruption, I do understand the scale of the problem insofar as anyone can understand volumes of money that end in "tn". But shying away from it, cowering behind awful deals while losing public assets isn't a solution either.

[1123581321]

Appreciate the response. Hopefully they regain financial aptitude.

[hotpotamus]

I don't have much to add, but I just took a re-watch of Monty Python's Meaning of Life. The opening scene (after the intro short film) is amazing in that it's only a couple minutes and shows many of the pathologies of a modern health system (despite being 40 years old now), while also being hilarious. It depicts the birth of a child where the mother is basically an afterthought to all the expensive machines that the doctors get to play with. As soon as they have the lady's legs in stirrups, a gaggle of onlookers is welcomed into the room, but the husband is asked to leave since he's "uninvolved". But most important the amongst the crowd is the administrator who explains how they cleverly use accounting to manipulate the costs of the medical equipment.

To cap it off, when the mother asks if the child is a boy or a girl, Graham Chapman responds, "it's a bit early to start putting roles on it".

[wil421]

How are you depreciating the MRI machine? Why is the year one cost so high? I would’ve expected the MRI machine to depreciate over a decade.

[chalst]

Depreciation is a term relevant to valuing assets and liabilities on the balance sheet and P&L accounts. oliwarner's figures are cashflow figures, a completely different kind of account, which is what you look to when asking how much financing is needed, a key factor in whether the purchase is given the go-ahead.

[oliwarner]

I'm not. I'm assigning a 15y lifespan, building in maintenance into the running cost and assuming we just run it into the ground; buying another every 15 years.

Year 1 is so high in the in-house models because that's what's paying for the machine.