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Providing Public Services: PFI under New Labour

Dave Prentis

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When the unions fought the general election with Labour, we campaigned for quality public services. We were supporting a government that has given us more doctors, nurses and teachers, shorter waiting lists and new schools and hospitals. But now this same government is introducing policies that threaten our public services, particularly the NHS and education. These policies were never discussed openly during the election.

What is worrying me is not only the direction but also the speed of reform. "What matters is what works" implies building a sound evidence base for policy. The rapid pursuit of outsourcing and private-sector provision without an evidence base, while actually ignoring evidence that challenges the policy, can only be described as ideological.

Hospitals and schools will shut if they don't win enough contracts or attract enough pupils in competition with their "rivals" from the private sector. Sometimes the the playing field is tilted further against the public sector, as in the case of housing, where councils are in effect prevented from investing directly in their own housing and are required instead to transfer them to private management. All new school investment is now being forced through the PFI or academy route. Architects' professional bodies are despairing at the lack of design imagination and at structures built to last little longer than the lifetime of the contract.

Of course some services are more equal than others. Schools and hospitals and other services provided through PFI and PPP are insulated from the market. The merchant banks have a guaranteed stream of income from these expensive and lucrative contracts for their lifetime, typically 25 years, whether the service or building is needed or not. In fact, public authorities will have to direct services to failing PFIs, and away from other efficient public facilities, to help balance their books. Some market!

It is common for school meals and cleaning contracts in PFIs to be given to subsidiaries of the consortium's members for 25 years without tendering or competition. And even when the service is poor the public sector has to pay to escape the PFI. For example, when Bedfordshire county council sacked HBS for poor performance on a £250m contract it had to fork out £7.8m to pay it off.

Gordon Brown, amid the foundation hospitals debate, made a speech to the Social Market Foundation (SMF) in which he said that markets in healthcare were inefficient, had imperfect information available and prioritised the wrong things. He was right, and the freedoms of foundation hospitals were restricted. In August John Hutton, the Cabinet Office minister, used the SMF to make the case for markets and competition in health and education to deliver better services and more social justice. He did this on the day the Office for National Statistics announced that social inequality had risen for the first time since 1997. Labour had stemmed the rise in inequality under the Tories with its public-spending increases and tax credits, but can it be right to conclude that we need more marketisation rather than less?

Markets in health are distinguished by the fact that every activity has a price and that more resources are diverted into negotiating prices, contract compliance and administering financial flows. Primary care trusts are to be turned from service providers into organisations that solely buy services, no doubt with the help of consultancy firms such as United Healthcare, headed up by the prime minister's former health adviser.

They will be obliged to create markets where none exist, just in the way publicly funded but privately run independent treatment centres (ITCs) have been imposed on local areas. The health secretary, Patricia Hewitt, has promised £3bn to the private sector for ITCs. It sounds like a good idea to shorten waiting lists - but not when they can poach scarce NHS staff; not when they are guaranteed a flow of operations that means NHS hospitals lose their work; not when they are paid more than the NHS. The ophthalmology department at the John Radcliffe in Oxford was undermined by the imposition of a treatment centre by the Department of Health, losing the routine cases that made it possible to train doctors and pay for the specialists used for the more difficult cases.

Efficiency will be the guiding force, not social need, and hospitals will specialise to maximise income. Preventing health problems is not a priority; as US health companies know, there is real money in treating long-term illnesses.

Already "payment by results" is destabilising local health budgets and the cost of PFI constricts hospitals even more. In 2004 we found that PFI hospitals had some of the biggest deficits and were shutting wards and freezing recruitment. This is being repeated in 2005 and the BMA is warning that there may not be jobs for those in the expanded doctor-training programme.

Meanwhile, the education secretary, Ruth Kelly, is is turning secondary schools into academies - owned by rich businessmen, showered with tens of millions of pounds of public money and allowed to teach whatever they want, even creationism!

All this wouldn't be so bad if there was any evidence to show that private companies are better at providing public services or that competition drives up standards. Quite the opposite. We have plenty of evidence showing that markets harm public services. What about hospital cleaning, or school meals, or the railways? These services have failed miserably. Is this what we can expect for other public services when competition and markets rule?

Take hospital cleaning, probably the service that has had the longest exposure to market forces. Now it is lean and cheap to run but fails to meet the standards of cleanliness needed. There are too few cleaners, a lack of training, casualisation and unacceptable levels of infections. That is the logic of the market.

Governments have short memories. This one has forgotten why we have public services in the first place - to tackle market failure, to ensure a safe environment, to safeguard public health and education, and to equip Britain for a leading role in a global world.

Although I lead the largest public-service union, I've deliberately not focused on the workforce. I have hardly mentioned the harmful effects contracting out has on pay, conditions, equal pay, hours, training, holidays, maternity leave and pensions. That's because I'm not just a trade unionist, but also a citizen who cares passionately about public services. That's why, as a friend of the government, I am worried that the waste and instability of public-service markets will not deliver a fourth term.

We know what works: sustained, high levels of investment; cooperation and collaboration, not competition; investment in staff and teamwork; joined-up thinking rather than fragmentation; embedding change rather than permanent revolution and upheaval. That's the message Labour members in Brighton want to hear this week.


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  • 11 months later...

In opposition Gordon Brown described Norman Lamont’s Private Finance Initiative (PFI) as “creeping privatization” and “a cynical distortion of public finance”. At this point Brown and Blair were totally opposed to privatization. They pledged that they would renationalize British Rail and other public utilities.

After being elected in 1997 Brown and Blair did a complete U-turn. Blair now told us: “Privatization should have a role to play not out of dogmatism but out of pragmatism.” Not only did the new Labour government not renationalize these industries, it added its own list of proposed targets: the Royal Mint, the Tote, air traffic control, and the Post Office.

One of the most controversial policies of the Thatcher government was the selling of council houses to tenants. Brown and Blair took it one stage further and private property speculators were invited to bid for government buildings and council homes were offered to private developers.

Brown spent more than £500m in City fees to protect John Major’s privatization of the Tube. As a result, the new Tube companies are now drawing bigger subsidies than under nationalization, accepting no financial risk and delivering a worse public service.

Brown was now a passionate supporter of PFI. By July 2003 Brown was able to announce the completion of 450 PFI projects, including 34 hospitals, 239 schools, 34 fire and police stations and 12 prisons. Virtually all NHS investment was now in the private sector. By 2007 some 20% of all current public expenditure is expected to be delivered by private contractors.

Why would Brown and Blair change their minds about PFI? It is not about saving money. Research shows that the cost of private finance is around 30% more than money lent by the exchequer. Of course, much of this spending does not appear in the current balance sheet. This is money that has to be repaid by a future generation of taxpayers. It is hard to work out how the country will be able to afford building schools and hospitals when the current government’s debts are being repaid.

The answer can be found in identifying who has benefited out of PFI. For example, why do Brown and Blair always use the bank UBS Warburg for their privatization deals? In 1997 the government was spending £300m a year on consultants. In 2005 it reached £2.4 billion. I wonder how much Brown and Blair are getting of this in backhanders.

Then there are the companies who get these PFI contracts. The most important of these are Capita, Carillion, Serco, Skanska and Jarvis. These companies also did well under the Tories. However, they have done even better under New Labour. It is no surprise that these companies now give money to New Labour rather than the Conservative Party. For example, Capita, had a turnover of £112 in 1997. By 2005 it had reached £1.4 billion. Capita, a major donor to New Labour, got the contracts to run Individual Learning Accounts, the Criminal Records Bureau, teacher pensions, miners’ compensation, London congestion charge and collecting the BBC licence fee.

Not satisfied with making large profits from these ventures, these companies often resort to fraud. For example, when the police investigated Capita’s Individual Learning Accounts they discovered that over a £100m from a budget of £274m had been stolen. However, no one was ever charged with these crimes.

Other PFI schemes initiated by Brown have been great failures. His University for Industry collapsed with losses of more than £200m. An E-University spent over £50m and never opened.

While enjoying a “holiday” in New England Brown arranged an Anglo-American science partnership. This deal involved Brown arranging for £13m being transferred to the Massachusetts Institute of Technology. So far, the British taxpayer has received no return for this money. Can the same be said of Gordon Brown?

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Service after service is being subjected to competition, and huge efforts are being made to move services out of the public sector, with massive incentives to attract the private and voluntary sectors. For the promise of a future payment of £2m you can own a brand-new £25m academy school, all paid for by the taxpayer. The government pays independent treatment centres up to 40% above the prevailing costs within the NHS, and gives lavish subsidies towards start-up costs for private hospitals. Private finance initiative companies will rake in £148bn over the next 25 years in return for providing serviced assets worth just £47bn.

A closer look at the markets that have been created quickly exposes the government's double standards. We are told that contestability is required to make public services competitive and efficient. But what is competitive about the exclusive 15-year contracts that form the basis for building programmes for schools and local health centres? Where is the competition in PFI, when a handful of construction and facilities-management companies control the market?

By taking such strong measures to enable large corporations to take over public services, the government has left a gaping breach between itself and the voters - the users of public services or, in the parlance of the market, the customers. This gap is wide enough for the newly caring Tories to fill. And why should it be harder to believe that the Tory party that started us down the road of privatisation, sold off so many publicly owned assets and starved what remained of public services of resources, now wants to support them, than that the Labour party that brought us the welfare state now wants to sell off and privatise what is left? This is the ultimate flaw in the government policy. If the voters had wanted a government that would transform public services into profit-oriented, lean, market-driven systems, they could have voted for the Conservatives at the last three elections. They still might at the next election. That is the real danger.

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How much longer can this farce carry on? Everywhere the chickens released by the government's private finance initiative are not so much coming home to roost as crashing into the henhouse and sliding down the wall in a heap of blood and feathers. The prediction made in 2002 by the Banker magazine - that "eventually an Enron-style disaster will be rerun on a sovereign balance sheet" - could be starting to materialise.

The private finance initiative (PFI) is the scheme allowing private corporations to build and run our public services and lease them back to the government. The government says that this allows it to commission more schemes than it could with public funds, and offers better value for money. And it doesn't seem to matter how often the story falls apart.

Last week, after spending £14m on lawyers, consultants, architects and miscellaneous money-wasting schemes, the NHS ditched its plans for a massive hospital in west London. The projected cost of the Paddington health campus had risen from £360m to £1.1bn, while the number of beds had fallen from 1,000 to 800. This is pretty normal for a PFI scheme; in one case I've studied, beds fell by 20%, while costs rose by 1,100%. What makes this case unusual is that the project was dropped before the money was spent.

Last Wednesday, the government admitted that PFI projects for council house repairs had been a costly disaster. This is hardly news to anyone who has watched this programme's seven-year meltdown. But despite the admission, the policy has not been officially scrapped; councils are still told they will receive no new money for refurbishments unless they hand their houses to the private or voluntary sector.

On the same day, we discovered that the PFI computer system that is meant to keep a record of MOT test results for cars in the UK has been delayed by another year. It was supposed to have been ready in May 2002.

On June 17, Scottish ministers decided it was cheaper to spend £25m buying out the private financiers who built the Inverness airport terminal than to let them carry on. In six years, the corporations had made £8.5m on an investment of just £5.5m. This is a photocopy of the Skye bridge bail-out; it was bought back by the Scottish executive last year for £27m. A bridge that should have cost £15m has hit the public for £93.6m.

Two days before the Inverness announcement, the Ministry of Defence quietly dropped a £1bn PFI scheme for military training. It didn't disclose how much money it had spent developing it.

On June 14, a leaked government report revealed that so many corners have been cut in the construction of a £47m privately financed mental health unit in Leeds that it might have to be pulled down and rebuilt.

On June 10, the National Audit Office published a report showing how the companies that had built the Norfolk and Norwich hospital had, as well as making stupendous profits, legally walked off with an additional payment of £73m by exploiting the gap between the financial risk the government said they had taken on and the risk they had really shouldered. It wasn't as if the government didn't know this was coming: in June 2001, a summary of leaked documents that showed this was going to happen was published in this column. The Treasury sat back and watched.

On June 9, the Health Service Journal published an extraordinary admission by a senior civil servant in the Department of Health. PFI deals, Bob Ricketts revealed, were locking the NHS into 30-year contracts for services that might become useless in five. "I've seen some awfully grand PFI schemes," he warned, "that are starting to give us a real problem."

So what has the government learned from all this? Nothing. It is ideologically committed to part-privatisation. It won't disclose how much it is planning to spend on PFI schemes - a spokesperson at the Treasury says this is "commercially confidential" - but it is locked into £3.6bn of new deals this year. According to a spokesman for the Department of Health: "The government has no intention of abandoning PFI." The heap of blood and feathers, though brain dead, keeps running.

So the government fobs us off with spin, misreporting and lies. PFI, the Treasury tells us, "is a small but important part of the government's strategy for delivering high-quality public services". Small? £42bn has been officially committed so far. This, according to the public-spending specialist Professor Allyson Pollock, is an underestimate, covering only the 43% of PFI contracts classified as "off balance sheet".

Less true still is the Treasury's assertion that there is "no bias in favour of any particular procurement route". As people working for NHS trusts and local authorities will testify, the government made it clear that for certain kinds of projects, public funds are not available.

But the biggest lie involves the government's claims of value for money. "All PFI projects," the Treasury says, "were delivered within public sector budgets ... no construction cost overruns were borne by the public sector."

Well, it's a bit like hospital waiting lists: it depends when you start counting. The genius of PFI is that the overruns take place before the project begins. There are three ways in which this happens. The first is that the schemes are tailored to suit the private sector. Where public money might have been used to renovate a hospital, PFI demands that it is pulled down and rebuilt. But the two costs are not compared; instead we are told we have a choice between rebuilding it with public funds or with private funds.

Then the next fiddle kicks in. Civil servants, knowing that, as the former secretary of state for health announced, "it's PFI or bust", must mash the "public sector comparator" figure to show that PFI delivers best value for money. As Jeremy Colman, at the time the UK's assistant auditor-general, said: "If the answer comes out wrong you don't get your project. So the answer doesn't come out wrong very often."

The third fiddle is that the concept of "risk transfer" can be used to come up with any figure you want. You simply announce that x million pounds of "financial risk" is being transferred by PFI to the private sector, and hey presto, it's x million pounds more expensive to build the project with public money. As the Norfolk and Norwich hospital fiasco shows, the risk costing bears no relation to any actual hazard taken on by the contractors.

Is it an exaggeration to say that we might be facing "an Enron-style disaster" in the public sector? I don't know. But there's something familiar about Colman's warning that the "pseudo-scientific mumbo jumbo" behind the private finance initiative's financial modelling "takes over from thinking. It becomes so complicated that no one, not even the experts, understands what is going on". And the record of the past three weeks is hardly reassuring.


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  • 2 months later...

An article on this subject by the Labour MP Kelvin Hopkins in yesterday's Guardian:


Labour is to win the next general election a major change of direction across a wide range of policies is now vital. Simply changing the names on the doors in Downing Street will do nothing to dig the party out of its current depression, nor revive the enthusiasm of the millions of Labour voters yearning for that fundamental break with Thatcherism they expected in 1997.

Beyond the Iraq war, nothing has dismayed Labour supporters more than the government's relentless determination to privatise public services. This is a policy - driven by dogma and the siren voices of the global corporations - for which there is, in reality, no logic. The government's obsession with the private finance initiative - a Tory concept - is irrational and should be abandoned.

PFI, and indeed much of the government's case for privatisation, is predicated on a myth that the Tories naturally do not challenge, given that PFI and mass privatisation were originally their ideas. That myth, the false premise of PFI, is that government borrowing - its gross financial liabilities - must be held down at all costs. This is nonsense. The Treasury has persuaded our leaders that it is vital to keep government borrowing as a proportion of GDP at around 40%. It has risen above that in recent years, but it is still very low by historical and international standards.

The latest available international comparisons from the OECD show that Britain has kept government borrowing (at 44% of GDP) well below those of the successful Scandinavian economies (Denmark 53%, Sweden 63%), and even further below those of the major eurozone countries (Germany 68%, France 75%). US borrowing (64%) is also well above Britain's, and Japan's (156%) is off the scale. In some of these countries there have been economic difficulties, but none has experienced anything like economic disaster.

Take the example of one very successful country, Sweden. Its gross borrowing in 2004 was 18% of GDP higher than that of Britain, a year during which Swedish real GDP growth was 3.7% compared with 3.2% in Britain. There is no reason why our government could not have borrowed more for public investment instead of straining to keep investment in the private sector.

Government borrowing also covers public deficits arising from cyclical downturns in the economy, when rises in unemployment cause benefit payments to rise and tax revenues to fall. It is reasonable to expect such deficits on the revenue account to be repaid during economic upswings, but it is nonsensical to use a temporary current-account deficit as a pretext for cutting necessary public borrowing for long-term investment, and seeking to replace it with more expensive private investment, which only makes the deficit worse.

The illogic of private investment being given incentives to replace public investment is compounded by the fact that the cost of government borrowing is much cheaper than servicing private capital investment. The money markets are generally enthusiastic about lending to government because such lending is secure, which is why the interest charged is low. By contrast, private-sector investment always requires a risk premium and profit-taking. If the government is paying the bill, the private sector will seek to pocket as much public money as possible. This has been nowhere more true than in the railway industry, where privatisation has been a financial disaster. Private estimates suggest that the recent cost of track renewals is between four and five times what it was under public ownership.

The Treasury has bragged about its supposed success in keeping down government debt by using private investment to plug the public-investment gap. This is analogous to a householder reducing his or her mortgage by paying off a chunk of low-interest borrowing from a building society with cash borrowed at a much higher rate of interest from a usurious moneylender.

As long as income is sufficient to pay the required return on money borrowed there is no problem. If one can raise such borrowing at a lower rate of interest then that is surely the sensible thing to do. The government has actually done the opposite by restraining public investment at low rates of interest and substituting private investment requiring higher returns. What is bizarre is that the Treasury - which has railroaded this policy through government - has recently been balking at paying the bills for some of the bloated PFI schemes it has itself promoted.

The gigantic cost of privatisation to the public purse, the taxpayer and the public-service user is a scandal that will haunt us for years to come. It is a legacy of Thatcherism and the Major years, and should be remembered as such. It is now time for Labour to call a halt to privatisation and to re-establish public borrowing as the basis for public investment. It would save the exchequer and the British taxpayer billions in the future. Even in the short term it would make life easier for Labour's new chancellor, freeing up funds to spend on the NHS, education and poverty reduction.

It would also be highly popular with the electorate - and put a smile on the faces of Labour MPs with small majorities who are now looking ahead to the next general election with trepidation.

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