Privatisation: More Loot for the Fat Controllers

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New Labour's policy of Public-Private Partnership or Private Finance Initiative (PPP/PFI) is second only to the war on Iraq as a source of anger and disillusion among its traditional supporters.

It means part-privatisation of key areas of the welfare state, falling just short of the outright privatisation epitomised by the railways. A central plank in the neoliberal agenda, PPP/PFI was launched by John Major in 1992 as an alternative to the state-based method of replacing or improving schools, hospitals and rail tracks, and of running services in health, education and transport, through taxation or government borrowing. Now Tony Blair and Michael Howard are haggling over the detail, but not the principle, of PPP/PFI.

Under PPP/PFI, a private consortium designs and builds a hospital or school, and operates non-clinical and non-educational services such as general maintenance, heating, catering and cleaning. For its part, an NHS trust or local education authority (LEA) pays an annual fee to cover both the capital cost, including the cost of borrowing and that of maintenance. In the case of London Underground, three private companies are responsible for the maintenance of track, signals, trains and stations for the next 30 years.

The argument is that PPP/PFI offers value for money in so far as the task of raising loans and taking risks falls to the private sector. Instead of relying on the state, and therefore on the 'weary taxpayer', NHS hospital trusts and LEAs must now turn to the marketplace with its competition, innovation, efficiency and therefore higher quality management skills. Hospitals and LEAs have to buy accommodation and services from private companies by entering into long-term contracts with them - typically 25 to 30 years.

Of course, the state remains the ultimate source of funds since it still has to approve PFI schemes, and provide NHS trusts and LEAs with the means of paying annual fees to the private sector. But, it is argued, far less is demanded of the state, especially as the ever-rising levels of investment now required in key public services would necessitate 'unacceptable' increases in taxation.

Do these claims stand up to scrutiny? Firstly, does PPP/PFI offer value for money? There is considerable evidence that PFI projects are more expensive than those financed from traditional public sources. This is measured by the project's 'public sector comparator', an assessment of its cost if financed solely from public funds. To begin with, private sector borrowing costs more than public sector borrowing, and of course the private contractors pass on to NHS trusts and LEAs the interest charges they incur. Secondly, the costs of setting up PFI projects are high (see the "Paying Over the Odds" section for the figures).

The scale of the costs becomes staggeringly high if one views their total over the entire length of the contract, as in a mortgage. The PFI-built Edinburgh Royal Infirmary will require the taxpayer to cough up over £30 million a year (at today's prices) for 30 years (£900 million in total, almost 12 times the cost of the hospital) to a commercial consortium, whereas if the government had paid for it the cost would have been £180 million. In the NHS, PFI more than doubles the cost of capital as a percentage of hospital trusts' annual operating income. Moreover, PFI binds the next generation to a debt which they will have to service year in, year out.

Furthermore, New Labour is planning to spend £43 billion on new PFI hospitals and schools before the next general election. However, a report in the Guardian in September 2002 quoted Sir Stuart Lipton, New Labour's architecture tsar, chair of the Commission for Architecture and the Built Environment, warning that 'the majority of PFI buildings are poorly designed and will fail to meet the changing demands of this and future generations'. The report also found that working in a poorly designed hospital contributes significantly to stress levels. A Unison report (May 2003) into nine PFI hospitals found that several hospitals were so stretched that temporary or old buildings had to be used.

As for the much-vaunted efficiency of the private sector, there have been numerous cases of time and cost overruns, hospitals not completed on time, and schools failing to open for the new term. In Haringey, the flagship PFI schools deal overran its original costing by £6.25 million-money which the LEA had to find by raiding the primary school budget.

So where does this leave the 'value for money' claim? What emerges from closer scrutiny is that PFI only seems at times to offer value for money because of two accounting tricks - discounting and the 'transfer of risk' to the private sector. Discounting refers to the fact that the Treasury adds 6 percent to the 'public sector comparator' to make up for the lowering of the value of money over 25 years, a skewing of the costing in favour of PFI. This figure has been repeatedly criticised by welfare economists as too high. As for 'risk transfer', what risks does the private sector incur? In reality, the main risks are those that arise from technical obsolescence, changing regulations and unmet patient needs, all of them risks which the NHS, local communities and patients will have to bear.

Is there any evidence that PFI has improved overall levels of service in health and education? On the contrary, there are two reasons to indicate that it has caused a deterioration. To begin with, it has displaced the burden of debt from central government to local NHS trusts and LEAs. It is the latter that now have the responsibility for controlling spending and organising services, which makes the development of an integrated national strategy harder.

Secondly, the high cost of PFI/PPP projects has presented NHS trusts and LEAs with affordability gaps. These have had to be closed by external subsidies, sales of assets such as hospital buildings or sports grounds, appeals for charitable donations, the diversion of funds from clinical or teaching budgets and, crucially in the case of the NHS, by 30 percent cuts in bed capacity and a 20 percent reduction in staff in PFI-financed hospitals. As A Pollock, J Shaoul and N Vickers argue in their article 'Private Finance and "Value for Money": A Policy in Search of a Rationale' in the British Medical Journal (May 2002), though funds to the NHS have increased since 1999, there is no evidence that much has flowed to frontline services.

Moreover, private contractors undertake to provide 'facilities management', that is, caretaking, cleaning and building maintenance. The companies cut jobs, pay and conditions to enhance profits - which can hardly fail to cause a worsening of services. According to the latest Unison report, 'Years of privatising public services have left thousands of workers employed by contractors on the lowest pay and conditions. Those covered by [legislation] have transferred with their public sector pay and conditions intact, often only to see both their pay and conditions erode over time. New starters have had to accept the worst pay and conditions offered by contractors and to work alongside better paid staff, creating a two-tier workforce.'

New Labour spokespeople wring their hands about the dangers of a two-tier workforce, but the employers - surprise, surprise - have been dragging their heels. However, Unison has succeeded in negotiating a patchwork of agreements protecting new starters in local government.

Meanwhile, the House of Commons Public Accounts Committee found that 58 percent of authorities with a performance review process had deducted from payments due to PFI companies - a clear indication that that they had failed to deliver the necessary levels of service (see the "Paying Over the Odds" section).

The result of these factors has been windfall profits for PFI contractors, out of all proportion to any risks they take, money which should go to finance the welfare state. As for the two private consortia on the London Underground, their contracts, worth £15.7 billion, will enable them to make profits of around 18 to 20 percent, a third higher than the norm for PFI deals.

Moreover, the greater profitability flowing from the stream of guaranteed payments over 25 to 30 years has prompted the companies to reorient themselves towards the provision of long-term management services, placing less emphasis on traditional one-off construction contracts. Amec expected a 3 percent return on traditional construction work, but its 2001 accounts revealed that their PFI contracts produced profits of £4.4 million on a turnover of £29.7 million, a margin of 15.8 percent. Serco made an 8.9 percent profit on PFI compared with 3.5 percent on its other activities.

The evidence suggests that in health and education much of the extra funding provided recently by the government has not gone into frontline services but rather into the coffers of the private companies to meet additional costs. What further proof do we need to establish beyond doubt that PPP/PFI benefits the private companies rather than patients, teachers, school pupils or passengers?

New Labour has so far got away with the first wave of PPP deals. There is a real danger that, perhaps with economic slowdown and in the absence of coordinated resistance, it will feel encouraged to move beyond creeping privatisation into outright sell-offs of the key components of the welfare state.

It is up to the working class movement to force full public ownership and democratic control back onto the agenda.


Paying Over the Odds

High price...
A study by the Audit Commission published in January 2003, 'PFI in schools', found that the private sector paid between 2.5 percent and 4 percent higher interest rates than if the councils had borrowed the money themselves.

This added costs of between £200,000 and £300,000 each year for every £10 million invested. The costs of raising finance for hospitals at North Durham, Carlisle and Worcester added an average of 39 percent to the total capital costs of the schemes.

...low quality
The report also found that 'the quality of the early PFI schools in our sample was, statistically speaking, not as good as schools built via more traditional means'.

The most frequent complaints about PFI schools were the small size of classrooms and inadequate heating, ventilation and storage facilities.

Overheads
Tower Hamlets council in east London was faced with a bill of £4 million for consultation fees to lawyers and accountants for a £48 million project - over 8 percent of its cost.

The study by the Audit Commission concluded that the construction and operating costs in all the six cases they examined were higher under PFI than they would have been under state funding. And a recent report by the National Audit Office found that the cost of setting up the London Underground maintenance deals rose by £590 million as negotiations dragged on for much longer than expected.