Tag Archives: public services

*PPP and PFI = Buy now, pay later

 “Figures obtained by this newspaper [Daily Telegraph] through Freedom of Information requests reveal the full, mind-boggling cost of the Private Finance Initiative (PFI) upon which the last government relied to fund its public sector infrastructure projects. More than 900 schemes have been completed with a total capital value of £56 billion – yet the amount the taxpayer will have to repay currently stands at £229 billion. That is the kind of interest rate a sink-estate loan shark would be proud of. In one particularly egregious example of how not to negotiate a contract, the Princess Royal University Hospital in Bromley in Kent cost the contractor £118 million to build but the final cost to the NHS will be £1.2 billion.” (http://www.telegraph.co.uk/comment/telegraph-view/8279753/Gordon-Browns-poisoned-PFI-legacy.html 24 Jan 2011)

Startling as the figures above are, if it had not been for the recession they could have been considerably higher because  there is no reason to believe the Labour Government would not have kept on accelerating their PFI  spending at frightening pace if the economy had not all but capsized in 2008.  The Daily Telegraph reported in 2006 that:

 “The size of the Government’s controversial Private Finance Initiative scheme is expected to spiral from £53  billion to almost £80 billion in the next four years.

Treasury documents reveal that ministers have approved 200 new PFI deals worth £26 billion to start by 2010, and the amount involved in each has almost doubled. The average size of each contract awarded for the next            four years is £130 million, compared with £75 million between 1987 and 2005.” http://www.telegraph.co.uk/news/uknews/1517684/Whitehall-oversees-huge-increase-in-private-financing-of-public-projects.html

How did Britain develop such an almighty and dishonest mess?  The Private Public Partnership (PPP) began in earnest in the 1980s as the Thatcher Government sought to both satisfy its ideological dreams (public service = bad; private business = good) and reduce the headline figure of a burgeoning national debt. In 1992 the major Government introduced a new form of PPP the  Private Finance Initiative (PFI) which was primarily a way of keeping money off the national debt books. The Blair and Brown Governments greatly increased its use.  

The really frightening thing is the fact that the true cost of these schemes is unknown. The £229 billion cited by the Telegraph is speculative. That is not because the paper has false data or has guessed to cover gaps. It is simply because it is impossible to quantify eventual costs. Sometimes this is because the contracts are so long that renegotiation of terms is built into the contract at certain points. In others, the contracts are too tight for the private company to make a reasonable profit and provide a decent product or service. Private companies may even accept risks and obligations in their contracts which they know they cannot meet and go into the contract with the intent of holding the taxpayer to ransom by saying they will not honour the contract unless the terms are improved. (The experience of military procurement shows how often original quotes are wildly below the actual cost).

Whether the default on contract terms is intended or not, it leaves the public body with a real headache. If they do not give in to a company’s demands or simply offer more off their own bat to keep the show on the road, they may well have to pay a new contractor even more than is being asked by the existing contractor. Nor is it a given that there will be another company which can take on the contract, because many public contracts are so large few companies could handle them and some, for example, the maintenance of the railways, requires specialist skills which are not readily available.

Then there is the problem of what happens if a company goes bust. It is all very well saying that the contractor will bear the cost if things go wrong. They may not be able to or be unwilling to bear losses and in either case liquidate –liquidation will be relatively painless because a company will have been set up to administer the contract and losses will be limited to the assets of that company. That produces the colossal administrative problem of what to do if a contractor fails to fulfil a contract. The state will no longer own  the facilities or employ the staff to take over a failed contract. If the contractor is providing an essential service such as health provision or running a local authorities schools, the contract cannot simply be allowed to lapse and time taken to award another one because continuity is essential. Such a situation opens the way to Governments being willing to pay well over the odds to keep the service running.

The contract to maintain London Underground which ended in tears in 2008 is a classic example of the problems of PPP and PFI. Ignoring the shambles which are our privatised railways, the Labour Government forced a PPP on the London Underground, one of the largest Metro systems in the world and a transport conduit absolutely necessary to London’s functioning, carrying as it does millions of people a day. They added insult to injury by retaining the running of the trains in public hands while putting the maintenance of the infrastructure – track, stations, signalling and so on – in the hands of private companies.  The fact that it was the maintenance of the infrastructure which has caused the most serious of the problems  in the privatised overground railways was recklessly ignored. Just to make sure that it was a disaster, the contracts were divided between two groups. In addition, the contracts to set up the PPP ran to some two million words,  which  made it a lawyers’ golden egg as squabbling between contractors and Transport for London continued incessantly which undermined the executive efficiency of both Transport for London and the contract holders. Here is the Daily Telegraph in 2007:

“The PPP was a classic Labour fudge. Labour’s reformers at the Treasury wanted to privatise the Tube, but old Labour had promised not to. The result was a Third Way on wheels, which repeated the Railtrack mistake of separating responsibility for trains and track. Under the PPP, the trains remained in public hands, with London Mayor Ken Livingstone in charge via the capital’s transport authority, Transport for London. The tracks, tunnels and signals were carved up, with three private infrastructure companies (infracos) undertaking to maintain and upgrade them on 30-year leases, starting in 2003.

Metronet – a consortium of WS Atkins, Balfour Beatty, Bombardier, EDF Energy and Thames Water – won the bid for two of the infracos, agreeing to do the work for £17bn.(http://www.telegraph.co.uk/finance/2812424/Signal-failures-that-sent-PPP-down-the-tube.html)

In May 2008, after a Metronet had a  period in administration, the two Metronet infracos were transferred back into public hands to Transport for London.  

This PPP had just about every flaw that one could imagine. The contractwas very long. Even if everything had gone to plan, the eventual cost to the public was unknown.  Right from the start the taxpayer was paying a subsidy to the private consortia of £1 billion a year, despite assurances originally that no subsidies would be paid.

The contractors’ liability for cost overruns was capped, more or less, at £50 million for each quarter of the 30 year deal and there was a disclaimer for events such as flooding. If the private companies ran into trouble, the taxpayer had to take over responsibility for 95% of the loans taken out by the private companies. Just to put the cherry on the cake, the private companies were given a “guaranteed” rate of return on capital of almost 20%, a return twice that considered to be a good commercial profit.

Apart from overly favourable contracts, the cost of PPP and PFI projects are expensive because the private concerns financing the projects have to borrow  money at a higher rate of interest than the Government can, perhaps 1-2 per cent  more.  That is because the risk is greater for the lender. The borrower has to make a profit on the borrowed money so he must charge more than he is paying for the money to finance the scheme

There is also the problem of divided responsibilities. We now have hospitals where there are separate PFI contractors for the food, for the ward cleaning, for the laundry, for the cleaning and maintenance of multi-media installations (TV/Internet etc) and the general maintenance of the building. No one has overall control. Head teachers with PFI maintenance contracts find they cannot change as much as lightbulb without getting the PFI contractor in. To add insult to injury such services often result in offensively high charges, for example:

“George Osborne, the Chancellor, recently told how he was informed that under the Treasury’s PFI service contract signed by Labour, the cost of supplying a Christmas tree to the Treasury stood at £900, despite being sold by the retailer B&Q for only £40.

A few months earlier, he had been told that the PFI contractor would charge £148.58 to provide a fish and chip lunch for six in his private office.

In the end, Mr Osborne, Mervyn King, the Governor of the Bank of England, and their team ate the same lunch in the Treasury canteen for £32.88.

Hospitals have complained that PFI service contracts mean that they have to pay up to £333 to have a light bulb changed.

A hospital in Hereford was charged £963 to have a new television aerial, and a school £1,000 for a computer desk which normally retails at £200.” (Daily Telegraph Rosa Prince, Political Correspondent 8:00AM GMT 27 Dec 2010)

One of the things which strikes outsiders as odd about PPP/PFI is the constant granting of contracts to the same bidders  after the bidders have already run contracts in unsatisfactory fashion. Capita is an example which comes to mind with, for example, the Criminal Records  Bureau fiasco of September 2002 when schools were prevented from opening for the new term because those working in the schools had not been vetted for criminal convictions in time, the Individual Learning Accounts scheme which resulted in a loss of at least tens of millions of pounds.

Part of the explanation lies in the size of the undertaking. Many of the contracts being offered are of a size and complexity to reduce the number of realistic bidders to at best a few and at worst one.  The other possible reason for continued contract winning regardless of performance is corruption. That is not to suggest that corruption has occurred to date, merely that the possibility exists

In modern times, the British Civil Service has been remarkably free from corruption considering the vast amount of money it disposes of each year. There are two sound reasons for this. The first is the tradition of public service. This developed primarily from  the lifelong  working careers public servants, especially senior ones, have commonly had and the ethos of the Civil Service as an apolitical  institution which serves not political ideology  but politicians in power with disinterested advice. Government since the 1980s have attacked both of these pillars of public service. They are currently reducing  the terms of employment of new civil servants, especially  with regard to their pensions,  and have  increased recruitment of senior staff from outside the civil service.  The most contentious of these are the large number of “special advisers” who are classified as civil servants,  but are really  party  political appointees. The most notable has been Tony Blair’s erstwhile director of Communications, Alistair Campbell.

The second reason is lack of opportunity. If the Government is spending taxpayers’  money on its own employees to do a job, any serious fraud is difficult because the money is kept within the public body concerned and rigorous accounting procedures can be applied. Where serious corruption amongst public servants has been found in the past, it has been  almost invariably in those areas where Government contracts are granted to private companies, most notably in Defence Procurement and building contracts.  It is a reasonable assumption that the more public contracts offered to private companies, the greater the corruption will be sim[ply because the opportunity is increased.  The example of local government where public contracts have long been used freely is scarcely encouraging.

Corruption is more than people receiving money in brown envelopes  or the provision of material benefits in kind such as expensive holidays. It is also the provision of jobs years down the line, directorships for politicians and civil servants who have granted contracts. That is next to impossible to prevent. Even if a law was passed banning any civil servant or politician from accepting a post with any company which has been granted a contract which has passed through their hands, the politician  or  civil servant could simply be handed a directorship with another company – the linkage in personnel  between major companies is positively incestuous – on the basis that “you scratch my back and I’ll scratch yours”.  

If corruption does occur, you can bet your life that the contracts will be less advantageous for the taxpayer than honestly negotiated ones. 

 Because many of the contracts are for periods of 30 years or more there is no meaningful political responsibility. The life of politicians in Government is short on average, either because of election defeats or sacking by the PM of the day. Five continuous years as a cabinet minister is good going.  In the vast majority of cases the politicians who made the decision to go ahead with PFI will be out of office not merely long before the final bills are paid but in all probability by the next Parliament after a contract is signed. Once out of office, they can ignore any problem which arises and the sad truth of the  matter is that nothing can be done to make them take responsibility for their decisions as things stand. At worst, all that will happen is  the electorate throwing them out at the next election, which for an ex-minister is no great loss. It should be added that it  rarely happens that an individual MP is thrown out by the electorate  because of his personal failings because the power of party label is too great.

The introduction of private money into public projects by any form of PPP is a fraud on the public.  As Hire Purchase used to be advertised in my youth, it is “Buy now, pay later”, but with the added difficulty of not knowing what the final cost will be.

 The honest way for Governments to finance projects is to raise taxes or increase the national debt. Then the public can see clearly what is being done and judge the cost. With PFI and its ilk, the cost does not appear as government spending immediately. It is Enron accounting, the removal of expenditure from the balance sheet for the present but not the future.  The expenditure only appears gradually as the debt is met by charging the government for the services provided or alternatively by charging the customer directly. For example, if toll roads are built  and/or maintained by private capital, the contractors could charge the motorist directly to recoup their costs.

But the deceit goes beyond the hidden deferral of expenditure. Much of the  detail of the contracts made with private companies is not being made available to the public one the spurious grounds of “commercial confidentiality”. 

All public/private financing is a political con – it is either deferred taxation (because the taxpayer has to service the debt) or the taxpayer pays through direct charging, for example, road tolls. PFI does not equal competition or higher efficiency, merely the taxpayer being locked into a system where the PPP/PFI providers can hold the state to ransom.

 * The Government defines PPP and PFI thus:

“Private Finance Initiative (PFI) contracts are a form of public-private partnership (PPP). Other forms of PPP include:

 Strategic Service Delivery Partnerships (SSDPs)

 Concessions (e.g. toll roads)

 Strategic Infrastructure Partnerships, such as the NHS Local Improvement Finance Trust (LIFT) programme in the health sector, and Local Education Partnerships (LEPs) in the Building Schools for the Future programme

Some PPPs may involve setting up Joint Venture Companies.

 PFI contracts allow local authorities to gain access to new or improved capital assets (most commonly, but not always buildings). The public sector may or may not own the assets, but in either case will pays for its provision and use, together with associated services (for example, maintenance, management, security, cleaning, etc). Capital investment in the assets is made by the private sector which recovers its costs over a long contract period (often 25 years or more).”http://www.communities.gov.uk/localgovernment/localgovernmentfinance/pupprivatepartnership/

%d bloggers like this: