These deals represent a colossal public subsidy to select private companies, all hidden from the taxpayer
“…apparent savings [from PFI] now could be countered by the formidable commitment on revenue expenditure in years to come.”
Alistair Darling, 1997
(As transport secretary 2003-2006, Alistair Darling supported major new PFI projects)
The government’s use of PFI [the private finance initiative] has become totally discredited…
George Osborne, 2009
(Last year alone George Osborne backed 61 new PFI projects, at an estimated value of £7 billion)
PFI schemes [are] taking NHS trusts to brink of financial collapse
Andrew Lansley, earlier this week
Britain’s public services are in debt to the private sector. Under a scheme known as the Private Finance Initiatives (PFI), the NHS is making annual payments of around £1.25 billion to a group of private sector companies, as payment to use its own hospitals. The figure that is slowly rising. Currently, the PFI costs for the NHS will come to £65bn (about 3% of the entire country’s GDP), for infrastructure worth just £11.3bn. The debts will not be paid off until 2048.
The NHS is not alone. PFI is very big business: costs total to around £267 billion (close to 12% of GDP) and annual payments total around £8.6 billion, for around 700 projects. These projects have a value of just £63 billion. But, new PFI projects start every year since 1992, by the Conservative, Labour and Coalition governments. Last year alone, 61 new PFI projects were procured, with a total value of £7bn.
PFI was first developed by the Australian government, and implemented by the Conservative government in the UK in 1992, before being hugely expanded by New Labour after 1997. The idea is simple. Private firms build and run infrastructure projects such as hospitals, schools, bridges, roads, or defence contracts. This infrastructure is then leased to the state, in return for payments over a period of decades, sometimes up to 60 years. Buildings and land are often sold to the private sector as part of the deal. In effect, it is a form of borrowing, allowing the state to invest in infrastructure now which it cannot currently afford, banking on rising growth in the future to pay of its debts to the private sector.
The Treasury and National Audit Office that PFI represents good value for money, claiming that “the private sector is better able to manage many of the risks inherent in complex or large-scale investment projects than the public sector”. All three parties have opposed PFI in practice, but embraced the practice while in government. But a closer look at the figures reveals something very different: these schemes are overcharging the public, and wasting hundreds of billions of pounds of taxpayers’ money. Worse still, the secrecy inherent in such schemes leaves them open to some extremely dubious, possibly fraudulent accounting. Such schemes are open to wide-scale corruption.
PFI is terrible value for money
In 2002, the Treasury released a study by Mott McDonald, a company which acts as a “technical advisor” on PFI deals. It claimed to show that PFI is indeed the best possible value for money. However, the study widely critiqued, and eventually exposed for manipulation of statistics throughout.
More thorough studies have revealed that PFI has raised the costs of infrastructure in the NHS- in part “for the simple reason that private capital is always more expensive than public capital”. But PFI offers extraordinarily high returns for investors- typically around 60%, but often much higher. Often PFI companies use a process called “refinancing” to increase their profits further, at the expense of the public sector. Contractors would need to make efficiency savings of at least 25% to offset this. This almost never happens. To quote one study:
What stands out is the disparity between the original cost of a building and the final bill—a consequence of higher interest and returns to investors… The genius of PFI is the way it diverts public resources from public to private interests.
PFI payments sometimes absorb over 15% of a hospital trusts’ income. In 2009, over half of the larger hospital PFI schemes were in financial difficulties compared to one in four non‐PFI hospitals. This week, we have seen one such trust face insolvency. This was entirely predictable- indeed, it was predicted as early as 1996 in a British Medical Journal editorial:
There is also a major worry about what happens in the next economic downturn, when public expenditure is reduced. NHS trusts are currently signing contracts committing future tax revenues to fund private finance initiative projects for the next 10 to 30 years. When scientific change or population movement or public expenditure cuts make particular facilities redundant, will the cost of premature termination of these contracts be greater or less than the cost of rationalising health care services under existing NHS procedures?
The high costs have resulted in service cuts in the NHS, with reductions in NHS dentistry, long term care, optical services, and elective surgical care. The government do not own these hospitals. As a result, private consortia make the bids, often with no involvement of clinicians or public health professionals. Bed numbers are reduced to make plans affordable without any thought of what the knock on will be for other parts of the NHS. Even when other services are cut, the PFI payments must continue: they were legally guaranteed by Labour in 1997. This has led to the grotesque situation of Edinburgh Royal Infirmary and Coventry University Hospital cutting doctors, nurses and beds whilst paying millions every year to the private sector for the use of its building.
It is no surprise that the BMJ editor Richard Smith has described PFI as “perfidious financial idiocy” and “A “free lunch” that could destroy the NHS”. He has stated “all the evidence we have suggests that it’s a very bad idea”.
There are countless examples of billions wasted in PFI schemes. The £2.7bn Scottish NHS PFI program will cost some £2bn more than it would have done if the Treasury had acquired the assets directly. The cost of just writing the £15.7bn contracts to upgrade the London underground were £400m, and one of the deals quickly collapsed. In 1998, Coventry had been planning to refurbish its two hospitals, at a cost of £30m. The scheme was found to be too small to generate profits for the private sector. Instead of refurbishing, the two hospitals were replaced by a single new one, the University Hospital, costing £174m. By January 2007 the price had risen to £410m. A bridge to Skye that should have cost 15m ended up costing £96m. Military satellite communications that should have cost £885m ended up costing £3.6bn. The Ministry of Justice paid out £12 for every £1 of private sector investment raised through PFI deals. £500m will be wasted on 9 empty fire control centres, no longer needed, but the contract cannot be altered or terminated.
Clearly, these deals are an awful deal for the taxpayer. Tens of billions of pounds could be saved by using other methods of procurement. Yet, despite claims that they would stop, the current government is increasing the number of PFI contracts.
Privatised Profit, Nationalised Loss
Undoubtedly, this is bad value for money! But at least -so the Treasury claims- the risks are taken on by the private sector. At least, if the project goes wrong, it will be the private sector that pays.
The problem is, that is a lie. Risk is not transferred to the private sector, as the House of Commons Public accounts committee has admitted. By necessity, public sector projects are underwritten by the government. It is the government that is responsible for the successful delivery of public services, and it is the government that would face blame if they failed. Risk transfer can never function in practice because the political consequences of letting most PFI projects fail wall are too great. When Metronet, contracted to upgrade the Tube, collapsed in 2007, it emerged that 95% of its bank loans had been underwritten by the government, costing the state £1.7bn. The M25 widening scheme, costing £5bn (public procurement could have cost just £478m) also needed to be bailed out. Due to the financial crisis, the entire PFI program has been bailed out twice, by Labour and Coalition governments, at total cost £3.5 bn.
What we see is in effect a huge public subsidy for a select few private businesses. The private sector is making huge profits at the taxpayers’ expense, with the state absorbing all of the risks, and paying the costs. Just as with the banks, the profit has been privatised, but we have nationalised the losses. This is distorting incentives and wasting hundreds of billions of pounds.
So why do governments of all colours make so much use of these catastrophic PFI schemes? Clearly they represent a terrible deal for the taxpayer.
Enron-style Accounting and Crony Capitalism
One of the early attractions of PFI was that it allowed governments to evade their own borrowing rules .
PricewaterhouseCoopers, who act as government advisors on PFI
From the beginning PFI was an attempt to get spending off the balance sheet
Tony Travers, local-government expert at the London School of Economics
The accountancy schemes of PFI deals have been compared to the fraudulent Enron and Lehman Brothers. “Commercial confidentiality” agreements mean that information on PFI schemes is often not publicly available. Until the government was forced to change the rules in 2009, 96% of PFI projects were not shown up on public debt figures. This allowed the government to spend huge amounts of money in rebuilding infrastructure, whilst keeping the costs hidden. This proved irresistible for Conservative, Labour and Coalition governments. The levels of debt being caused by these hugely expensive PFI deals were concealed from the public.
The secrecy behind the PFI deals may go a long way to explaining the dubious assumptions used to justify many of the schemes. According to Seán Boyle, Fellow in health policy analysis, King’s Fund there are two main problems:
The first is a lack of openness surrounding the whole process, resulting from commercial sensitivity. The second lies at the heart of the planning process for public services: the questionable assumptions that lie behind many hospital schemes in the pipeline. These criticisms are linked. The ability to assess the appropriateness of schemes depends on the opportunity to examine publicly the factors behind one choice rather than another.
Indeed, many of the deals behind PFI deals are extremely dubious. They bear all the hallmarks of corruption: manipulation of figures to guarantee one firm gets the valuable deals. Many deals have been found to be infringing competition law by rigging bids. One third of PFI projects attracted two bidders or fewer between 2004 and 2006, mainly because of lack of bidder interest. Frequently there has only been one bidder. In effect, according to Professor Allyson Pollock, professor of public health research and policy, PFI companies are forming cartels. The government is helping them to do this.
The procurement processes often take years, during which -with no rival firms to compete- the contract can change hugely. For University College London Hospital, where the price of the PFI project increased from £120m to the order of £430m in the three-year period prior to signing off. The National Audit Office concluded that this distorted market has led to higher construction and finance costs for the public.
Figures have often been massaged, or outright distorted to guarantee that PFI contracts go ahead, instead of public procurement. The UK’s assistant auditor-general has pointed out: “If the answer comes out wrong, you don’t get your project. So the answer doesn’t come out wrong very often.” Some of the public sector comparators used, he said, are “utter rubbish” and “utterly irrelevant”. The calculated risks are often distorted to get the desired outcome. A paper in the British Medical Journal shows that before risk was costed, the hospital schemes it studied would have been built much more cheaply with public funds. After costing the risk, they all tipped the other way; in several cases by less than 0.1%. The BBC’s Panorama has found confidential documents for the Royal Liverpool Hospital, that suggest direct manipulation of figures. Government figures showed that using PFI to build the hospital would be significantly more expensive than other methods. Yet, four months later, sums were redone, showing PFI was cheaper, based on dubious assumptions- including that the private financers would settle for lower profits than almost every other deal. This allowed figures for PFI procurement to appear cheaper than government procurement- by 0.03%. MP Margaret Hodge, Chair of the Public Accounts Committee has admitted she thinks “Liverpool is a fix”. Distortion of the figures seems to be commonplace: evidence is manipulated to make sure that PFI deals always appear to be the best value for money.
Yet, many of the firms that profit most from PFI also hold influence over the treasury. The relationship between the PFI firms and the government is extremely close indeed- many of the people responsible for PFI policy have profited from it hugely. This, perhaps, provides another explanation of why the government and Treasury have been so enthusiastic to pursue a policy that can only be described as hugely wasteful. Jeffrey Spence used to work for the bank HSBC, now he’s on his third stint at the Treasury. Richard Abadie came on secondment from the City accountants PwC and has since returned there. Charles Lloyd was also loaned out by PwC. He too has returned there. Many of these firms are precisely the same as those that seem to be influencing the treasury over tax avoidance, as I mentioned in an earlier post.
Taken in this light, the reasons for PFI start to look a lot less like mere flawed accounting and more like outright corruption. Clearly, this cannot be proved, yet the evidence seems overwhelming. The extreme secrecy around deals and the manipulation of figures, which officials must know will cost the tax payer millions of pounds but benefit a handful of chosen firms, are hard to explain in any other way. The PFI deals represent the worst sort of crony capitalism: the state handing out billions to a few chosen private businesses.
It’s time to end PFI
The use of PFI seems indefensible: the only people to profit are a handful of powerful companies. These PFI deals are wasting billions of pounds of taxpayers’ money, in deals that are secretive and often seem to be highly corrupt. All political parties have criticised PFI in opposition. The SNP in Scotland has gone some way towards ending ts PFI programs. It’s time to do the same across the UK.