The recession is spreading fear through Whitehall as it threatens the government’s plans for the NHS.
In closed meetings last month NHS managers and health secretary Alan Johnson gloomily acknowledged that the government’s hospital building programme faces a “capital desert”.
New projects worth billions of pounds are facing possible cancellation.
At the centre of the crisis lie the failures of the Private Finance Initiative (PFI) – where a private company builds a hospital and then leases it back to the NHS, typically for 30 years.
PFI is the main way in which hospitals have been built under New Labour.
The leaked minutes of last month’s meeting show a glimpse of the panic.
Health boss Graham Eccles wrote, “PFIs have always been the NHS’s ‘Plan A’ for building new hospitals.
“There never was a ‘Plan B’. Now none of the banks have any money or are likely to have any for a few years, the absence of a ‘Plan B’ is going to cause a real problem.” He is right.
Research by Mark Hellowell from Edinburgh University reveals that the investment of £4.4 billion in new hospitals announced in 2004 has been slashed to just £2.85 billion.
He points out that plans for new hospitals in Merseyside, Birmingham and north London have been cut in half, while Leeds and west London have seen theirs cancelled altogether.
PFI was already a disaster for the NHS before the recession set in. In 2005-6, half of NHS Trusts with major PFI projects were in financial trouble, compared to fewer than a quarter overall.
This crisis can be traced back to the introduction of an “internal market” into the NHS and a system of “payment by results”.
These were devised by the last Tory government but greatly expanded under New Labour.
As a result, hospitals are paid for every patient they treat, rather than the size of the population they serve.
This means that if a new facility does not get used at full capacity, it costs the NHS more money than it receives.
According to Hellowell, that problem is made worse because the amount that trusts receive per patient does not cover the higher costs of PFI-built facilities.
The result is that PFI threatens the quality of patient care.
Yet despite the growing evidence that PFI is failing the health service, the government seems ready to bail out many of the giant construction firms that are most heavily involved in it.
The original justification for the higher cost of PFI projects was that the private sector was to bear the risk involved in financing, building and managing these large-scale projects.
But now, as the money markets have dried-up and are reluctant to lend to PFI projects, the treasury is offering to guarantee investment – giving private firms a publicly-funded subsidy.
It is not only PFI schemes that could be bailed out.
From next year, the first wave of contracts for Independent Sector Treatment Centres (ISTCs) – privately run facilities designed to provide the NHS with extra capacity – will come to an end.
After this ISTCs were supposed to continue without the government subsidies they have enjoyed over their first five years.
But NHS chief executive David Nicholson says the onset of recession means that the removal of government support would “create difficulties”.
Banks are apparently reluctant to carry on lending to ISTCs now that they are set to lose their state handout.
The department of health is preparing to step into the breach. It is planning to borrow money on behalf of the centres to make up the shortfall from the banks.
The private sector was supposed to bring efficiencies and savings to the NHS.
But, as the economic crisis becomes deeper, it is sucking more money out of the system – with the government keen to help.