From The Times Online
A scheme that was supposed to save money is stacking up debt for generations
IT IS now 12 years since John Major announced the Private Finance Initiative — time enough, one might have thought, for it to deliver the promised better value for taxpayers’ money, improve efficiency and a transfer of risk to the private sector.
But it hasn’t worked out that way. Indeed, in many ways the entire enterprise may turn out to have been misguided.
Despite what some in the City see as a sharp deterioration in public finances, Gordon Brown, in his Pre-Budget Report this month, made no reference to the impact this could have on the PFI. Yet there will be an impact. Look, for example, at Jarvis, which controls about a tenth of the £36 billion PFI debt across the public sector, including work on 120 schools. It has just been forced to sell large parts of its business to repay some of its £230 million debt. If Jarvis goes bust, who picks up the pieces?
PFI spending has been rising rapidly under Labour. In 1995 it was £670 million but by last year it had hit £7.7 billion. By 2010, it is expected to reach £11 billion. But this understates future commitments. The Government is already pledged to make revenue payments to PFI contractors by 2028 of more than £110 billion, a colossal sum equivalent to about a tenth of current GDP.
In some areas the PFI has produced significant savings — on road and prisons projects, for example. But National Audit Office (NAO) reports show a different picture for schools and hospitals. These conclusions, however, need to be heavily qualified.
First, Government tells public service managers that they will get funding only if it is provided by the private sector (“It’s PFI or bust,” as one minister delicately put it), and only if that provides better value for money than public funding. To help in reaching that conclusion — and in effect rigging the result — the accountancy device of “risk costing” has been introduced. This means that, while under conventional accounting it would be far cheaper to build a new hospital with public funding, the extra cost of the “transfer of risk” to the private sector suddenly tilts the balance towards private finance.
Secondly, this “transfer of risk” to the private sector is anyway a mirage. If a major PFI contractor went bankrupt, the Government would have little alternative but to bail it out. That has already been demonstrated in the case of Railtrack, the Channel Tunnel consortium, the Criminal Records Bureau, air traffic control, and the Benefits Agency. When the Passport Agency PFI went badly wrong, the agency had to spend an extra £13 million to protect both the service to the public and PFI shareholders’ profits.
Thirdly, cost overruns in some schemes have led to hidden cutbacks elsewhere. A survey by the British Medical Journal of 13 NHS trusts has found that the average reduction in bed availability in England under PFI schemes has been 26 per cent. It has also recently come to light that secret clauses written into PFI contracts with the NHS stipulate that substantial penalties must be paid if the number of patients treated exceeds a set figure (for example, 90 per cent bed occupancy), even if they are emergency cases — an extraordinary barrier to the Government’s objective to reduce waiting lists.
Fourthly, PFI contracts offer a legal guarantee of profits to private consortia at public expense over 30 years or more. The pressures that this will exert on the public accounts are incalculable. Fifthly, arguably the biggest drawback of PFI is that by locking the NHS into long-term contracts it reduces flexibility, a quality required to respond to changing healthcare needs. A wider concern, echoed by the NAO, is that the PFI programme will perpetuate the present NHS emphasis on high-cost hospital-centred healthcare. This is in contrast to the Government’s wish to shift care into community clinics and doctors’ surgeries.
For all these reasons the case for PFI is not made.
Very large uncertainties remain, both because the private contractor is often a shell company that transfers risks to sub-contractors, making it difficult to see where and how risk is borne, and because risk transfer is limited by a variety of financial mechanisms that obscure its value.
According to the Institute for Public Policy Research (IPPR), only 6 per cent of PFI projects have been subjected to an independent examination by official audit bodies. The Public Accounts Committee complained last year that it had tried to understand “the relationship between the returns which contractors earn from PFI contracts and the risks they actually bear. At present the available information is limited and rather mixed.” When £110 billion is at stake over the next 25 years, such ambivalence is unacceptable. Any further PFI contracts should now be halted until these fundamental questions are answered.
So why does the Government still persist in support of PFI? The usual answer is that it allows spending departments to escape Treasury financial controls. Even this does not stack up. Public sector net debt has fallen so far as a percentage of GDP since 1997 (from 42 per cent to 31 per cent) that all the PFI projects signed up could easily have been funded by public expenditure, at much cheaper borrowing costs, without raising public sector net debt above 40 per cent of GDP, and thereby not breaking Gordon Brown’s sustainable investment rule.
If this is not an exercise in down-sized semi-privatisation to dismantle the NHS, as many critics claim, a much more convincing rationale for PFI will have to be found. In the absence of that it should be abandoned before too great a millstone is hung around the neck of future generations.
