PFI and the Tory Psyche

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The mighty @NHSatMB project an NHS privatisation counter on roof of CPC. #CPC14

By David Younger

So much of the debate leading up to the referendum has revolved around the economy and economic matters in general. But there has been a systemic failure on the part of both sides in the debate to fully examine the financial position of the UK. I find this mystifying although it might be argued that the complexity of such a matter would make it impossible to make a point which the public would understand. I do not believe that is so. In fact, quite the opposite. Expenditure in general terms is easy to understand. The reasons for certain types of expenditure and, more importantly, the methodology employed are slightly more complex and difficult to grasp.

Conservative governments have, for over a century, been obsessed with reducing spending. This mindset has some merit when applied to current account expenditure but most Conservative administrations have treated capital expenditure in the same way, preferring to concentrate instead on tax cuts. Over the last hundred years, the involvement of central government in the provision of services and general infrastructure has steadily increased and the need for capital expenditure has increased in parallel, creating a bigger problem as time goes on. Labour’s attempts to address infrastructure deficits have come under sustained and largely successful attack by the Conservative party in opposition – how many times have we heard the phrase “tax and spend”?- and this has created an atmosphere which makes raising funding for infrastructure investment through the tax system not just politically difficult but political suicide.

No matter how fixed the idea of starving the country of infrastructure investment is in the Conservative psyche, eventually money has to be spent – new hospitals, schools, roads and railways have to be built.

And so, in 1992 the government came up with a new wheeze. At the time, the neoliberal philosophy had gained so much traction with the political classes that the idea of Public/Private Partnership (PPP) began to develop substance, and in its wake, a radical new proposal took shape. Named the Private Finance Initiative, it was slow to take off – partly because the very government that hatched the idea had grave misgivings about it. By the time Labour were elected in 1997, PFI contracts were worth, in total, less than £4bn.

PFI deals work in the following way: the government (via the relevant authority or agency) decides that – say – a new hospital is required. Bids are invited from relevant contractors or – more likely –consortia. So far, so simple. Then things become more complicated. The idea is to eliminate capital expenditure so the contractor is expected to fund the project, the completed building is to be leased back to the primary user and, in order to improve the return to the investor, various additional sweeteners are added. In many cases the land on which the building is built is given to the contractor and remains in the contractor’s ownership. The term of the lease is fixed and inflation-proofed. Maintenance contracts which were supposed to be built into the deal are routinely made the subject of additional costs. In fact, many PFI contracts are so complex that it takes an expert in contract law to understand them fully.

Two reviews of PFI contracts were undertaken in 1996 and 1998. Neither fully addressed the wisdom of the process in general but concentrated on examining the need to create a public sector structure for the future procurement of PFI contracts. The first full parliamentary review took place in 2000, at which time some £12bn worth of contracts were already in place. The committee’s report refers, in several sections to “value for money”. It is clear that there is a problem here. “Value for money” seems to mean different things to different people. Worse, in sections 24 and 25 of the report there is evidence of a stunning naivety on the part of the committee whose view neatly sums up as “we get value for money because the private sector is always better at these things than the public sector and they are telling us that we are getting value for money”.

Section 36 of the report also highlights the difficulty of using true comparators to assess this “value for money”. The contract details are “commercial in confidence”. We are not allowed to know the terms of these contracts and therefore cannot assess their value.

The CBI pointed out in section 29 of the report, that, should a contractor fail, the government gets the assets by default. No they don’t. If the contractor fails, the assets go to the creditors who, for the most part, are not bound by the terms of the deal. They could, conceivably, turf the occupants out of the building and sell it on or redevelop it for purposes entirely different from the original intention.

The fragility of the entire PFI process from the public sector point of view is thrown into sharp relief, distressingly so, by the conclusions of a House of Lords’ report of 2010 which starkly concluded that “it was not necessarily the case that value for money should be taken into account when considering a Private Finance Initiative contract…”

Currently, the sum total of PFI contracts in place is £69bn and a new round of contracts, mostly in the health sector but increasingly in education, is in the pipeline. Also major transport contracts such as HS2 and Crossrail 2 are in the offing.

So what is the risk?

Well, these contracts, on the face of it, have a lifetime of between 15 and 40 years at the end of which the government is not obliged to enter a new contract. Except that, in most cases it would be impossible not to. In the case of the NHS, land which once belonged to the NHS has been given to the PFI contractor who then builds the hospital and leases it back to the NHS trust involved. In the case of Norwich General Hospital, their current contract is for forty years but barely ten years into the contract, changing needs indicate that the buildings will be unsuitable by about twenty-five years into the contract, leaving the hospital struggling along with poor facilities or requesting a new building. Disputes over what constitutes routine maintenance and what are additions to the original fabric are adding to the running costs which, of course, include the lease. A new hospital will probably be required long before the current building reaches the end of its design life, which could leave the trust in the surreal position of paying for a lease on the new building while continuing to rent a building which no longer exists. Even if the trust reaches the end of its lease and decides that it is better to build a new hospital from its own capital budget – unlikely in any event – it would have to find a new site – around 70 acres, and in a convenient position for suppliers and patients.

The health unions have identified a hole in NHS funding which they estimate to be currently £30bn. I have not had the opportunity to verify this figure but it has to be remembered that each new hospital built with PFI funding adds significantly to NHS running costs without adding a single new bed, doctor or nurse. In effect, the NHS funding requirement, if the figures quoted are correct, is £30bn higher than it should be. This figure is set to double by 2020. The profits accrued by the PFI contractors are in the region of 20-25% annual return on capital and, to add insult to injury, many of these contractors have bundled up the finance, restructured it and moved it offshore. They don’t even pay tax on their profits.

The inevitable conclusion here is that the NHS has to be privatised. The additional burden of maintaining PFI contracts is eating up public sector funding and already in England three trusts are in imminent danger of collapse. There is no alternative. One trust in Scotland – Lothian – has followed this route. It is notable that, on the back of that experience, Alex Salmond decided that the rebuilding of the Southern General Hospital should be paid for from public funds thus reducing their running costs and giving greater flexibility in planning for future requirements.

I have concentrated here on the effect of PFI on the NHS. There are some stunning examples of the waste and inflexibility of PFI deals on other infrastructure investments, but to catalogue them all would require vastly more chapters in this saga. Two things should be noted, however. One is that around eighty per cent of all PFI contracts (by value) are in London and the South East and that ninety-five per cent are in England. The other point is that the cost of maintaining them is increasing at the rate of about ten per cent per annum. At that rate, paying for PFI funding deals will cost about 50% of all annual revenue by 2030. The current increase also means that there is a permanent deficit in public spending. Austerity cuts will continue unabated until there is nothing left to cut. This is one of the reasons why Westminster was so desperate to keep Scotland in the Union and, incidentally is the primary reason why Scotland will not get the full revenue raising powers it needs. Scotland produces a revenue surplus which has been pointed out many times during the referendum campaign. Without access to this surplus the UK government has to make substantially greater austerity cuts than it is currently making. The likelihood is that the crisis in Westminster’s spending would become catastrophic by 2020 without Scotland’s contribution.

There are solutions to Westminster’s problem – I’ll save them for another time but as they involve making a significant U-turn from the current neoliberal ideology, it’s for the readers of this article to decide for themselves how likely any of these solutions will be adopted.



Categories: Austerity Britain

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22 replies

  1. This is one of the most distressing and disturbing articles I have ever read in Bella. Having said that , it needs to be spread far and wide. People must be told the truth. Thank you for writing this and clarifying an issue I had absolutely no knowledge of.

    • 100% agree. This has to be shouted loud and long till the NO-ers finally decide to listen and to hear just what their vote has dragged Scotland back into. And this PFI is just one aspect of how bad things are – how could they be so stupid?

      ‘…Austerity cuts will continue unabated until there is nothing left to cut. This is one of the reasons why Westminster was so desperate to keep Scotland in the Union and, incidentally is the primary reason why Scotland will not get the full revenue raising powers it needs. Scotland produces a revenue surplus…’

      • Echo Wilma and the Baron’s sentiments. My initial reaction was Holy Cow !

        I was aware of the PFI deals and their burden on us, but not about land ownership issues. Thanks David, an excellent easy to understand article.

        I hope to hear more from you soon, articles like this are much needed.

  2. Well Here we go!
    The hatred and contempt I have for Gordon Brown grows by the day.
    This is a man ” I use the word MAN loosely”
    Who when in office pushed this PFI onto the people of this nation to give a pay off to his backers in big business. This coupled with him selling off 400 tonnes of the nations 700 tonnes of gold reserves at rock bottom prices ” refereed to as Browns Bottom ” in financial circles, To bail out a private banker in New York, and the deal was brokered by none other than Goldman Sachs.
    How is this man not on trial for TREASON.

  3. A good publication for a lot of these corrupt PFI deals is actually Private Eye, who have been complaining about them since their inception in the 90s.

    • Private Eye, is one of the few print news papers worth the money and read.
      Never scared to hold a light up to establishment corruption and double dealing.

  4. Can I just add,
    Gordon Brown Today is now asking people to signe a petition asking his friends and partners in the better together westminster appreciation society to honour their “VOW” to Scotland in the now desperate and ailing Tory/Labour rag “The Daily Record” HAHAHAHAHAHAHAHA
    You have to laugh or you would cry.
    Please continue to boycott this fowl Rag.With luck we might get some decent new news papers when these establishment mouth pieces are gone.

  5. The article would be improved by:

    – mentioning the Public Sector Borrowing Requirement – which was the motivation for getting into this form of financing in the first place – http://www.bitsandbobs.scot.nhs.uk/pfi.html

    – the Scottish Futures Trust – which include a Scottish attempt to secure private investment for public services using Non Profit Distributing contracts with private investors, rather than PFI – http://www.scottishfuturestrust.org.uk/our-work/funding-and-finance/

    I think we should do more bond issues, both at local and national level, to secure private investment in public infrastructure.

  6. I think PFI,was a scam from the start I would like to know who are the share-holders in the consortia,maybe not who we expect! Now as for paying the lease money directly to the consortia what is wrong with deducting the tax at source? and handing the consortia the rest,tax fully paid,or was that blocked out at the start? Tony Blair and his pals introduced the PFI system here,which meant we paid 20 times what the cost should have been,and how strange that so many of these Labour socialists are now millionaires and get fat cheques for speeches at various company dinners.

    • As I said, I am convinced that Tory Tony Blair was a plant in what was left of the Labour Party bought and paid for by Big Business to continue the NeoCon agenda started during the Reagan and Thatcher era and sooo robustly continued by Bush, Blair, Brown and Co.
      Their corruption and hypocrisy knows no bounds.

  7. An important contribution to the lesson that “public expenditure” needs to be controlled by the public – not left to the “market”, whose sole motive is profit.

    In a citizen-controlled direct democracy such as the Canton of Zurich, the constitution – drafted by an elected body that included ‘ordinary citizens’ and approved by the cantonal electorate in a referendum – public spending is subject to constitutionally prescribed rules. For example, any non-recurring public expenditure of 6 million Swiss francs or over is subject to a “facultative” or optional referendum i.e. a (cantonal) parliamentary decision to spend such a sum can be challenged by the signatures of only 3000 registered voters. The issue then goes to a cantonal referendum.

    Similar rules apply at local and national level. Two recent examples from the national level:
    – in February this year there was a referendum on the expansion and financing of the Swiss rail network. 62% of the voters approved the plans.

    – in May this year there was a facultative referendum on the proposed purchase of new jet fighters. 53.4% of the voters on a 56.3% turnout said “No” – so the plan was dropped.

    Now that’s what they call democracy!

    • We/Scotland should look at real democratic countries like Switzerland at this time of debate.
      What type of democracy do we want?
      I remember cringing not so long ago, when the “Irish Tiger” was being lauded as something to aspire to.
      Sadly for the Irish people the bubble burst on that load of nonsense and there wonderful democratic government passed on the debt of a private bank to its people.
      I would also point to Iceland for inspiration as well as some of the Nordic countries systems.

  8. God! One wonders if the Mafia is involved here – government advisers and contractors working hand-in-glove to swindle the country. In voting YES we did our best to get away from this kind of criminality/incompetence. Let’s keep on trying.

    • We need to keep on trying until we break free from the corrupt banker occupation.
      Any one wanting to educate themselves about the power, corruption and manipulation of our so called democracy should watch MAX KEISER on RT

  9. a very clear easy to understand article its a shame our media will bury it in the same way as when they handled the referendums uncomfortable little questions this whole issue raises the question are Labour fit to do or handle anything ? Scottish Parliament Building = time and cost overrun — Edinburgh tram project = time and cost overrun Glasgow Airport rail link just as well that little gem was dropped or there was the makings of another edinburgh tram fiasco PFI well who knows how this mess will end up ,rather than the usual wringing of hands and the public pay i don’t know if the Scottish government can bring this mess to a dead halt right now never mind the bloody lawyers our government is the law by our consent not some shifty lot of crooks posing as lawyers tear up the reams and reams of one sided bloody gobbly gook then its right lads this is how we are going to continue ok are you listening ,oh you can’t do that oh really WHO says we are in charge not the other way around

  10. I’m sure Business for Scotland had articles on the UK’s financial position, but it’s unlikely they received media coverage.

    In the UK, public sector investment has declined from 7% of GDP in the mid 1960s to 1.5% of GDP now, with the UK ranked 24th in the world for quality of infrastructure.

    According to SCOTLAND’S INFRASTRUCTURE: Delivering Firm Foundations for the Future (N56 Scotland Means Business) the UK invests less in infrastructure than any other advanced economies, making the UK economy less competitive. UK investment in infrastructure has fallen below the 0.8% of GDP benchmark considered necessary to support an advanced economy. If investment is not taken back to this level it could cost the UK economy £90bn per year by 2026 with Scotland’s share of that loss £7.5bn

    On the 0.8% benchmark, Scotland would require annual infrastructure investment of around £1.2bn per annum to deal with historic underinvestment.

    The report cites Ireland’s National Development Plan as an example of how investment in infrastructure should be planned strategically.

    This report is well worth reading and does deal with PFI.

  11. Thanks Bella. The whole PPP / PFI issue is so important yet little known about and understood. I hope this welcome and accessible article is shared widely.

    It’s in the public domain (but not easily accessible of course) that the City of Edinburgh Council alone is bound into contracts that will mean paying out well over £1bn for new schools over 30 years, plus almost £82m for IT services under the obscene racket that is PPP.

    Think of the total that local authorities throughout Scotland (and the UK) will be paying out. They are being forced to cut jobs and services while subsidising the private sector.

  12. I agree with your criticism of PPP/PFI. I think it’s important to point out, however, that the current Scottish Government has expanded the PFI scheme since coming to power, so we are more in hock than ever. They have changed the acronym to NPD and made some cosmetic changes but left in place every one of the issues you detail in your article.

    For interest this is the “contractor take” on NPD – they are clear that it’s business as usual:
    http://www.partnershipsbulletin.com/features/view/975

  13. Plenty of commentators have commented on the UK economy during the debate. The problem is that we have commented on articles or blog posts or Facebook pages and barely get listened to or read.
    In The Great Scottish Land Grab two solutions to this problem are proposed: Cafe Politics where people debate what concerns them in a semi formal setting; and government by referendum where we get to decide government policy.
    We the people do know how to fix some of the problems created by governments. For the rest, we can always work something better out.

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