Private finance idiocy?
By Ian Fraser
Sunday Herald
February 9th, 2003
Gordon Brown, chancellor of the exchequer and Tony Blair, UK prime minister Photo PA / The Herald
IT was seen as a gravy train that would permit the private sector to milk the unsavvy public sector dry, ride roughshod over the unions but nonetheless provide the electorate with better quality and better maintained schools and hospitals.
While PFI’s proponents — including Tony Blair, Gordon Brown and, less enthusiastically, Jack McConnell — view it as a mechanism that permits the government to offload the burden of risk for capital projects onto the private sector, its opponents dismiss it as a mere “conjuring trick” that will cost taxpayers more than conventional public funding in the long run, while conveniently disguising government borrowing in the short term.
Under PFI, privately-owned consortia bid to build new public assets such as schools, hospitals and sewage works, which they then lease back to the state for 25-30 years. It does permit large numbers of new buildings to be erected at great speed, but it also means taxpayers are going to be lumbered with stiff rents for those assets for a generation to come.
Critics say the chickens are going to come home to roost when in 2030-40 the NHS and local authorities remain tied to expensive rentals for what could by then be obsolete buildings. In this maelstrom of conflicting views on PFI, who are we to believe? Let’s start with some facts.
The protracted and costly process of bidding for PFI projects is proving far more effective at screwing down private bidders than the initiative’s critics claim. Far from being an opportunity for private sector players to fleece the public sector, PFI contracts are proving so onerous that support services firms, such as Amey, are experiencing severe pain, with their share prices decimated, because they have so wholeheartedly embraced the funding mechanism.
Such firms have been hit by the high cost of bidding for projects coupled with the fact that project returns have been coming in at around 13%, much lower than the expected 15-20%. What’s more, the Treasury has wised up to the savings that can be made from refinancing projects once the riskiest phase is complete. At the same time, new competitors have entered the market, putting further pressure on margins.
Trade unions have been concerned about the impact on pay and conditions, though they have been partially placated by a deal with the Scottish Executive that ensures there will not be a “two-tier” workforce. There is also concern that equity stakes in PFI projects — such as Amey’s in Edinburgh and Glasgow schools — can be sold on like any other business.
Last week SNP leader John Swinney challenged McConnell to order an inquiry into PFI after revealing Amey had made pre-tax profits on its schools PFI projects and other deals. Swinney said Amey had made profits of £13.2 million in the year to December. The profit was based on turnover of £42.2m giving a profit margin of 31%. Swinney said: “Labour have repeatedly and deliberately refused to tell people what level of profit PFI companies make. Now the dirty secret at the heart of PFI projects is out, we must have an immediate inquiry into Labour’s privatisation programme. Jack McConnell’s refusal to allow Audit Scotland to look at the books can only mean that he has something to hide.”
Other critical questions include whether PFI is delivering better quality buildings and a more pleasant environment in which people can learn and be cured. The signals are conflicting. Anecdotal evidence from users and healthcare professionals suggests the new Edinburgh Royal Infirmary is not up to standard, inconvenient to navigate and that it would probably have been better to have retained and redeveloped its Lauriston Place site. There are also repeated allegations of a shortage of acute beds.
Professor Allyson Pollock, health policy specialist at University College London, said: “The rate of downsizing [reducing the number of hospital beds] has been much faster in Edinburgh than in the rest of Scotland. Overall it has been around 24%. The high cost of PFI is being passed down to the local level, causing budget cuts and an erosion of services.” Her views were last month backed up by the Audit Commission, the government’s spending watchdog, which dropped a bombshell with a report comparing 17 PFI-funded schools with 12 built using traditional public finance. All 29 were below “best practice” standards, but the PFI-funded ones were found to be significantly worse for light, space, heating and acoustics, with little evidence of design innovation.
Architects in Scotland and the rest of the UK have consistently condemned PFI funding as leading to poor quality design. The Audit Commission also said the anticipated benefit that building contractors would be reluctant to cut corners as they would be locked into a long-term maintenance contract was “not yet widely apparent”.
But a spokesman for the Scottish Executive’s finance department defended the policy. He said: “It would have taken Glasgow City Council 30 years of spending its entire capital budget to have undertaken a project on the scale of Glasgow schools. It has given kids clean, modern, bright and watertight schools with all the latest facilities.” He stressed that PFI has delivered facilities and services that meet quality targets on time and on budget – a total of £2 billion worth of deals with £2bn in the pipeline, including three major hospitals, 78 new or refurbished schools, three further education colleges, 10 water and sewerage schemes, one road and one prison.
Recent expansion of the programme, coupled with Gordon Brown’s resolute defence of PFI in his Social Market Foundation speech last week, suggest the Executive’s enthusiasm is likely to remain undimmed. Almost every Scottish local authority has now embraced PFI with the notable exceptions of West Dunbartonshire, Clackmannanshire and Falkirk, which are run by opponents of the Executive coalition parties. But is it providing value for money?
An Audit Scotland report in June 2002 says not. Having studied six PFI schools projects, the watchdog said: “The overall financing cost varied in the range of 8- 10% a year, 2.5-4% higher than a council would pay if it borrowed money on its own account for a similar project.” However, this was contradicted by a surprise National Audit Office report last week that suggested PFI is delivering quality construction projects on time and to budget. The report cited “strong evidence that the PFI approach is bringing significant benefits to central government in terms of delivering built assets on time and for the price expected by the public sector”. However, the NAO did not consider value for money, adding: “It is not possible to judge whether these projects could have achieved these results using a different procurement route.”
There was also little data on user satisfaction and more should be routinely acquired, the NAO added.
Then there is the single biggest flaw in PFI: the uncertainty over who really bears the risk when things go pear-shaped. Despite thousands of hours of legal time spent drafting the contracts, the issue often ends up being fudged. There is often an assumption that, when the push comes to the shove, the other party will shoulder the risks. Some observers have argued that many of the UK’s PFI projects are effectively “built on sand” because of this lack of transparency.
Copyright 2003 SMG Sunday Newspapers Ltd.
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Posted by Ian Fraser
on Feb 9 2003. Filed under Article Library.
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