*PPP and PFI = Buy now, pay later


by Robert Henderson
http://livinginamadhouse.wordpress.com/?p=622

“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/

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16 responses to “*PPP and PFI = Buy now, pay later

  1. I have a cunning plan in my manifesto to sort this out.

    Clearly, all taxes on incomes and profits will be abolished and replaced with taxes on land values or land ownership.

    But in the small print, the exemption from income or corporation tax will only apply to income from contracts which are concluded after my government takes over. So any normal employer/employee or supplier/customer will run the old contract through the photocopier, re-date and re-sign it and take advantage of the tax exemption.

    Conversely, public sector salaries, public sector pensions, PPP and PFI contracts, which arise from ‘old’ contracts will simply not be novated, my government will tell them to take the income and pay the VAT, income tax, corporation tax AND the LVT on their schools, hospitals, retirement mansions etc.

    So the chances are, the PPP and PFI people will abandon their contractual rights unilaterally, thus getting the taxpayer completely off the hook.

  2. So what should the government do then? Being as Mark Wadsworth is not in charge of government :) Liked the manifesto.
    As a newbie to this, trying to “comprehend” a practical way forward. What can happen now, in reality, under the present government?
    Put contracts back into in-house control? That is not a Libertarian, or sensible idea, as the state then takes control, and though things could be ‘accounted for’ there is no ‘accountability’ – that’s what I experienced anyway.
    Put public utilities – schools, hospitals, train-line and maintenance , road building and maintenance et al totally into private consortium’s – a sell the ‘franchise’ off out of government control kind of thing; would there be takers? Of course if there was big bucks to be made through this then private enterprise would have taken it onboard more thoroughly; one reason the state took over the running of was because there was vast inequalities and provision of health etc. within the country; as private only flourished where it was cost effected; the cost of outlay overriding the profit margin, so few hospitals, few schools and a calamity of the transport structure, was the outcome, duplication and fragmentation of services. Is that one reason the railways et al were nationalised? I mean apart from the political ideology of state central planning?
    I do not think giving tax relief or ‘sweeteners’ to contractors has helped either. It is take it or leave it as far as I am concerned. Giving sweeteners corrupts the market and you get false picture, and this time an indulgence of private, instead of an indulgence of state manged. Both are indulgences when ‘falsely’ induced to take on something they would not take on in the first place, and neither helps bring down the cost to the tax payer.
    I am aware I am at a 101 level here but as I sai I am trying to ‘comprehend’.

  3. There are only two choices apart from the present situation: you put the welfare state entirely into the hands of the private sector – which would result in gross under-provision as it always hasd in the past – or you return public provision back the public sector which will guarantee universal provision. Which would you prefer?

  4. Actually, Robert Henderson, i, and a great many other people, would prefer that we do anyway with the entire concept of the ‘welfare state’ all together.

  5. In reply to Robert.
    Is it a fact that welfare was under provided before 1948? Or is it a combination of payment and services? My folks had to pay their GP so much a week to have access. The cottage hospital was cost-ed up front or a pay weekly thing. Which to my folks was the same as them being taxed to fund welfare. The same for help with saving for Christmas and unemployment. Just because welfare is not provided by the state does not mean it will be under-provided by private, or does it? It is access to such services that is the crunch. You could, in theory, have one mega school and hospital state financed and run in each city, but though that might be state of the art it still would not be accessible for outer-city dwellers, not universal provision at all then, and under Labour it was going that way.

    It is not just who runs such services, private or state, but how. Personally private could function as a fee paying cottage industry. Without sweeteners of course. And to me free (as in private) means no money to set it up from the government, you want fee schools then the parents and a private consortium must pay for it. You want free hospitals then ditto, no use of NHS equipment or staff without being billed as such – the full cost. I think this government expects private to take up the slack of welfare produce – we have private consortium’s looking at ESA aka Incapacity Benefit provision via form and interviews. In truth no private providers could cater for total universal provision of welfare resources, but when there was universal provision via the state it got bigger bureaucratically, lost its reason for being and thought it was a private industry, without being accountable to anybody really. Like I said, the bigger it got, mega hospitals for instance, and the closure of cottage and local hospitals, universal provision really became just a word for government control.

    Sorry for the ramble but I do not think government is better than private just because the word universal is still linked with government provision. It’s only universal when access is available.

    If I’m wrong then I am happy to learn.

  6. C H Ingoldby, and others, good morning, well it is where I am :)
    You and others, “prefer that we do anyway with the entire concept of the ‘welfare state’ all together”. I take it you do not want universal provision of health care, education, safety net for people that cannot afford services for whatever reason, provided for by the state through direct taxes? Your preference being as it was before 1948? Or a combination of USA pre-Obama health care through insurance and charitable and philanthropist organisations?

    I have picked on health care because that was where I started my career.
    So I am trying to absorb and understand the political and civil implications.

    Thank you for all being so helpful and articulate in your responses, it does help.

  7. Pingback: Private or State? – Healthcare « Thinking

  8. Pingback: State or Private? Healthcare 2 « Thinking

  9. I have known many libertarians who espoused the view that there should be no taxpayer funded welfare…. until they hit hard times. Then they were only too eager to take whatever they counld from the state. I have never met a libertarian who refused state help when they needed it.

    EFGD – There was under-provision of welfare before the Attlee government’s extension of the welfare state. Until then Britain had a welfare state of sorts. Indeed, one could argue that England had had one since the Poor Law of 1601 which made the relief of the poor a statutory duty for parishes throughout the country. Until the Poor Law of 1835, the administration of Poor Relief was often pretty relaxed with a good deal of outdoor relief (money paid to those living outside the workhouse) practised.

    By 1945 Britain had quite extensive welfare provision following the creation of state-sponsored insurance schemes by the Asquith government before 1914. But it was far from universal. If you weren’t in employment which allowed you to pay into the state-sponsored insurance schemes, or failed to pay in, you were left without the dole or medical help. You might get free medical help from charities but it was very hit ansd miss.
    Dental treatment other than extractions, was largely a middle and upper class practice with working class youngsters often having all their teeth out by the time they were 21.

    Ask a working class person who was alive in the 1930s what they thought of
    welfare before 1945. They will invariably in my experience tell you vehemently how inadequate it was.

  10. Hi Robert
    Actually that is what my folks used to say.
    So do Libertarianists want universal welfare but only if it can be provided by private consortiums, private insurance, private saving schemes, which of course should be a choice for individuals to make, which is one of the reasons Obama-health has been criticised, many other reasons too I know, and not universal provision of health care, education, or a safety net for people that cannot afford services or insurances, for whatever reason, provided for by the state through direct taxes?

    I wish I’d known what I do now when I was employed by the Health Service and when, as a mature student, at University. I guess that is a fact of life. Thank goodness the University I went to was not a collage reformed one, as we were told this is what the subject is, these are a list of dissertation titles, go read and think for yourself – of course we had lectures and seminars, but spoon fed we were not, as some students at other University/Collages felt they were, horses for courses as they say, which, for me at least, was an adult, academic and itellectual way of reading a set of subjects. Still, wish I knew then…:)

  11. Taxes on land ownership or land values are Sweet Fanny Adams to do with PFIs

    What on Earth is wrong with this blog? And with the Libertarian Alliance in general?

    This is just not the Libertarian Alliance I remember – it is being taken over.

    Still the actual subject.

    PFI – or private/public partnerships are a total mess.

    They always have been (long before they were called PFIs) indeed Ludwig Von Mises was attacking schemes like this – back in the Austria of the 1920s.

    One even older example is not a “private finance – then we pay over the years….” one.

    It is a “we will split the bill” one.

    In the early 1800s it was decided (by the “experts”) Scotland (especially the Highlands) needed lots of stuff – roads, ports (and on and on).

    The government split the bill with local landowners.

    The projects were well built, by Thomas Telford.

    BUT……

    There was no great economic boom in the highlands – the wonderful public works did not produce one.

    All they did was get the govenment deeper in debt (on top of all the French war debt that was being piled up) and get the landlords deep in debt also.

    The landlords started to get desperate – and they noticed that a lot of their tenants were not paying much rent (when they paid rent at all), and they started to think they might be better off using some of the land for other things.

    The Highland Clearances, of course one can defend them (after all had the Clansmen stayed on this thin soil they would have died in heaps in the 1840s when the potato blight came – just as so many people did in Ireland), but the fact remains that the Clearances were debt driven.

    And there is also the “little” fact that they FAILED – the landlords went bankupt anyway (the sheep they put on the land could not compete with English sheep – or even with sheep farmed thousands of miles away, often by the very Scots Clansmen they had kicked out of the Highlands).

    See I can go wildly off topic also.

  12. Robert Henderson has a complaint about the government health, education and welfare schemes of the 1930s.

    They were not big enough – Britian should have been MORE statist.

    Once I would have asked what a person like Mr Henderson is doing on a “libertarian” blog.

    Now I understand what this blog actually is – and how (possibly) Mr Henderson is one of the moderates – compared to some other people who post articles here.

  13. Paul Marks: “Once I would have asked what a person like Mr Henderson is doing on a “libertarian” blog.”

    Does that mean that only Libertarians should be on a Libertarian blog, Conservatives on a Conservative bog, Labourites on a Labour blog etc.?

    The only way for people to understand different opinions and not stick heads in the sand or cover their ears and close their eyes is to access blogs that differ, or not, to what they think or believe in.

    I personally have learnt a lot, been made to think and reflect. Accessing all types of political blogs helps me not to be a moronic fanatic who idelises a leader or party or organisation, be it of a political, business, science, atheistic, agnostic or religious led and or based one.

    I have associated with “groups” on the Internet that were so upset at someone saying erm, are you sure, and I disagree because…It became almost a personal attack on the commentor.

    Whether I agree with the principles of Libertarianism in total is neither here nor there – what I like is the debate it causes not just amongst the Libertarian minded themselves but by other people like me and those who differ strongly. It makes one use the “little grey cells” – well for me it does :)

  14. EFGD I am afraid that many of those who call themselves libertarians are as rigidly ideological as the deepest dyed Marxist. Mr Marks is one of that breed.

    Paul Marks – As I have explained in another tread, I describe myself as a social libertarian because I am concerned with the circumstances which promote individual freedom rather than followuing an ideology which like all ideologies is an inadequate guide to the real world. Power relationships should be what libertarians are concerned with, not a religious worship of property or how the circumstances which promote freedom arise.

  15. There is a difference between comments and postings.

    For example a letter to the editor – from a welfare statist to a libertarian magazine is fine.

    But welfare statist articles in a libertarian magazine are NOT fine.

    The same is true for blogs.

    However, this is NOT a libertarian blog (that has become painfully obvious).

    Actually Mr Henderson is PERHAPS one of the less nasty people here.

    I will test that….

    Mr Henderson – do you believe that Charles and David Koch should be robbed of their property?

    Would you join the blag flag people and the red flag people (the communal anarchists, the Kevin Carson people, and the Marxists, the Code Pink people) in their attacks on such rich people?

    A simple test – and you do NOT need to be opposed to the NHS to say “NO I WOULD NOT DO SUCH THINGS – I DEFEND THE RIGHT OF THE KOCH FAMILY TO THEIR OWN PROPERTY AND THEIR OWN FREEDOM OF SPEECH”,

    Indeed the vast majority of NHS supporters would also OPPOSE the attacks on rich people – such as the Kochs.

  16. Since the ancient world it has been known that the least stable societies are those where wealth is hoarded disproportionately by the few. Hence, property is a social matter as well as an individual one. If the concentration of wealth in few hands makes a society dysfunctional , then the society needs for its own continuation to restrict such concentration. Those who control great wealth become the modern equivalent of mediaeval over-mighty subjects.
    As to the justice of taking property from those with great wealth, consider two facts. First, most great wealth is inherited and thus not obtained through any merit of the possessor and the origins of that wealth are often criminal, land seized by conquest or monarchs and then redistributed by sale, for example, the monastery land in England, or the granting of property to favourites. Second, many of those who accumulate great wealth today have done so not by creating anything worthwhile, but through the control and manipulation of the banks to the detriment of everyone else.