Declan Gaffney and Professor Allyson Pollock claim Labour's bid to disguise public sector borrowing is costing the NHS dearly

The SNP's proposal for Public Service Trusts to replace the controversial Private Finance Initiative has been shot down by the Labour party and described as unworkable by the Chief Executive of the Bank of Scotland. The Scottish Health Minister, Sam Galbraith, has claimed the SNP would stop the largest hospital-building programme Scotland has seen, and has accused the SNP of failing to understand the basic principles of accounting. However, Labour's attacks on the SNP say more about its own policies than those of its opponents.

Let us deal with the ''largest hospital-building programme Scotland has seen''. This gives the impression the PFI is bringing additional hospitals into the NHS. Not so - as people in Edinburgh are discovering to their cost. The current wave of PFI-funded investment involves the most drastic reductions in acute hospital capacity seen in the NHS. Each of the first wave of PFI-funded hospitals is a two or three-into-one scheme where the building of one new hospital is posited on the closure of at least two others. Bed reductions are, on average, 30% of current available beds. Nursing staff budgets are being cut by 10%-20%. It is the scale of service reduction and privatisation associated with PFI which the SNP proposals were intended to address. Mr Galbraith asks if the SNP is saying it does not want the new hospitals and schools this investment is building. This is an insult to voters, implying

the dazzling facades of new hospitals will blind them to the reductions in services required to pay for them.

So far Labour has insisted value for money was the motivation for PFI: private sector involvement leading to greater efficiency and savings for the taxpayer. The real motivation was to keep investment in public services off the Public Sector Borrowing Requirement, disguising government borrowing. Mr Galbraith's response amounts to an admission of this. The SNP claims it could borrow money at rates below those available for PFI schemes, but Mr Galbraith says the only way to reduce the rate is by the government guaranteeing the loans and counting it as public sector debt.

This admission is long overdue, but Mr Galbraith muddies the waters by confusing the costs of borrowing to the private sector and the much higher cost of PFI to the public purse. The confusion arises from failing to distinguish between interest rates PFI consortiums pay to banks and charges paid by the NHS to the consortiums. Consortiums building PFI hospitals attract low interest rates: however, the taxpayer will not benefit from this. The interest rate on PFI borrowing is around 4.25%: banks are prepared to lend at this level of interest because the government is guaranteeing the loans, just as the SNP has proposed: compensation clauses in the PFI contract for the new Royal Infirmary in Edinburgh guarantee payment of debt in the event the contract is terminated, even if this is due to default on the consortium's part. The same is true of other PFI contracts. And, should an NHS trust be

unable to meet the debt service costs, the Scottish Office will pick up the bill under the 1996 residual liabilities bill, rushed through by the Tories with Labour's support.

Benefits of low interest rates which private sector consortiums negotiate are not passed on to the NHS. The interest rate the NHS will be paying for the Royal Infirmary deal is more than 10%. This results from the government's wish to keep the investment off the public sector's balance sheet: installing a separate company - the PFI consortium - between the NHS trust and bankers, disguises the fact the Government is borrowing from the private secto: it can claim it is buying a service from a private sector company. In the hope of making this convincing to accountants, non-clinical services are transferred to the consortium and NHS staff are privatised. The consortium charges the NHS enough to cover its borrowing costs and adds on the return to its shareholders, bringing the annual cost to the NHS to 10%.

The excessive cost of PFI and the privatisation of public-sector workers are thus the result of the government's attempt to disguise its borrowing. The same logic means the resulting hospitals and schools must never be public sector property. As Mr Galbraith notes: ''The truth is that if the asset [the hospital] is retained by the public sector at the end of the concession period, then it will count against the public sector debt during that period.''

Labour's defence of PFI thus turns on the opportunity it offers for politicians to disguise public-sector borrowing while building up debts for future generations. The SNP is to be congratulated for forcing the government to admit this. If the SNP's aim was to perpetuate in another form the PFI scam of privatising in order to disguise public borrowing, then Public Service Trusts won't do the job, although it look increasingly unlikely the PFI will either, as accountants and auditors begin to put existing PFI deals under the microscope. The SNP needs to make its position clearer. In the meantime its proposals have led a Minister to come clean on the twisted logic underlying Labour's PFI policy.

n Declan Gaffney and Professor Allyson Pollock are members of the Health Policy and Health Services Research Unit, School of Public Policy, University College, London.