Monday, November 19, 2012

25 reasons to oppose PFI/PPP - UK Experences

1. Reconfiguring services - PFI/PPP affects all staff and services

The government emphasises that PFI/PPPs are contracts for services, not buildings, which makes the distinction between support services (such as building maintenance, cleaning, catering, transport and other related services and core services such as teaching and medical treatment) divisive and unsustainable in the longer term. Capital expenditure forms on average just 22% of the total cost of PFI projects (Andersen/LSE, 2000).

State withdrawal from ownership and management of the infrastructure has profound implications for core services. PFI/PPP consortia will eventually include private companies bidding to manage schools and local education authorities or private healthcare companies. 

PFI/PPPs create artificial divisions between core and support services, for example, dividing health and education teams both between white collar and manual services and between core services and supplementary activities. Partnership consortia have an economic interest in the performance of the core service within their building. For example, a PFI/PPP consortia has a direct interest in a school’s educational performance, in maintaining pupil numbers and ensuring its popularity is translated into maximising income generation from community and business use of the facilities. Conflict and tension will exist between partnership and non-partnership schools over the quality of teachers, which schools are allocated resources for new or special projects and the distribution of any future budget cuts between schools and services. Consortia will, therefore, want to ensure that they have the best teachers and minimum disruption to the running of ‘the business’.

Once the private sector controls the operational management of facilities they will be in a powerful position to influence service delivery policies. It makes a nonsense of the team approach, integrated services and joined-up government to which almost everyone has been striving for years. 

The current division between core and non-core services is unlikely to be sustainable. The concept of the public sector continuing to provide core staff and buying space in an increasing number of privately managed and operated is not credible. PFI/PPP consortia are also likely to want to expand the range of services provided. They are likely to make LEAs and Governing Bodies ‘offers’ regarding support services and additional teaching which will widen in scope (Whitfield, 1999). Facilities management contracts are re-tendered every five to seven years to give consortia a degree of ‘financial flexibility’, an opportunity to impose substantial changes in the labour process and provide a ‘PFI/PPP valve’ to relieve financial pressure.

The case for PFI has, in part, been justified on a division between core (teaching, clinical services) and non-core services such as facilities management. This was always fraudulent because a division cannot be made in practice. The government is currently negotiating with private health companies who want complete control of the 26 new NHS fast track diagnosis and surgery centres employing doctors, nurses and all clinical and non-clinical services. This finally exposes the lie that PFI is limited to the provision of buildings and related services. PFI is privatisation by stealth, privatising those parts which could not, at least politically, be sold off as complete services. It is the route to the ultimate marketisation and privatisation of health, education and social services.

Private sector takeover of ‘failing’ services and/or authorities results in commercial values being embedded in the public sector, leading to a spiral of decline and privatisation. A two tier public/private system will develop with the public sector increasingly marginalised and residualised. Despite the development of super-hospitals, twelve of the fourteen first wave PFI/PPP projects had an average 32 per cent reduction in staffed acute beds in the 1996-97 period.

Evidence of moves to include core services:

* The Welsh Assembly blocked a bid by the Conwy and Denbighshire Health Trust in March 2001 to include 23 renal nurses and ward clerks in a PFI project for a new renal and diabetic unit at Glan Clwyd District General hospital. The full business case had been approved by the Trust and the North Wales Health Authority. Staff would have transferred to Fresenius Medical Care had the move not been blocked.

* The government is holding discussions with the private sector over the possible private management and operation of the new NHS fast track centres.

* The Department of Health has established a joint venture company, NHS Local Improvement Finance Trust (NHS LIFT)  with Partnerships UK PLC (see Section 11) to finance primary care facilities. The DoH will invest £175m in the company over the next four years with matching equity from Partnerships UK. It will own and lease local health facilities, premises for GPs, dentists and chemists and will initially concentrate in inner city areas. It will extend the principle of PFI/PPP to community facilities. "NHS LIFT is a catalyst for change with the aim of stimulating long term interest amongst a wide range of investors" (DoH website).

* The outsourcing of LEAs, City Academies and the takeover of ‘failing’ schools by private contractors is likely to lead to private companies employing all school staff, including teachers.

2. PFI/PPPs are often more expensive than publicly financed projects. 

The government can borrow at lower rates of interest than the private sector. A sample of PFI schemes (excluding NHS projects) concluded that the current weighted average cost of private sector capital on PFI projects is 1-3 percentage points higher than public sector borrowing (Andersen/LSE, 2000).

* PFI increases the cost of hospital building. Total project costs (construction and financing costs in a sample of hospital projects were between 18-60 per cent higher than the construction costs alone (for example, North Durham 60.6% higher, Norfolk 49.1%, Bromley 35.8% and Greenwich 30.8%. 

* PFI/PPP availability costs (in effect the repayment of financing and construction costs) were between 11.2 - 18.5 per cent of the construction costs in contrast to 3.0-3.5 per cent annual interest on publicly financed projects.

The government claims that the private sector “can compensate for the higher cost of borrowing” by being more innovative in the design, construction, maintenance and operation over the life of a contract by avoiding “costly over-specification in design”; create greater efficiencies and synergies between design and operation; invest in the quality of the asset to reduce maintenance costs; and to “manage risk better” (Treasury, 2000).

3. Escalating project costs 

Escalating costs are a common feature of PFI/PPPs, for example, Birmingham City Councils schools project rose from £20m for eight schools to £65m (rising to £70m in 2000) for ten schools prior to selecting a preferred bidder (ADLO, 1999). The first 14 NHS projects had an average 69 per cent cost increase between the Outline Business Case and early 1999.

* The cost of the new Worcester Royal Infirmary increased 118%, rising from £49m in 1996 to £108m in 1999 (Pollock et al, 2000). This was partly due to an increase in beds from 380 to 452 but £29.9m were probably attributable to ‘financing costs’.

4. Whose value for money?

The Andersen/LSE study claimed that the average saving for PFI, measured against the public sector comparator, was 17% based on projects operational by late 1999. However, this was not a technical sample because it was made up of PFI projects submitted by civil servants and excluded all NHS PFI projects. 

Other evidence suggests that the value for money claims are much smaller:

* The first PFI school project, Colfax School in Dorset, was only about 2% less than the public sector comparator.

* The Dartford and Gravesham Hospital is expected to cost a mere 2.8% less than the public sector comparator (NAO, 1999), the Carlisle hospital indicated a 1% saving (Gaffney et al, 1999) and the North Durham hospital Full Business Case indicated a nil saving as the PFI and public sector comparator costs were the same (Gaffney and Pollock, 1999).

5. PFI projects commit future governments to a stream of payments 

PFI contracts commit public bodies to revenue payments for 25-35 years.

By 1999, future commitments for PFI projects totalled £83.8bn up to 2026 (Budget Red Book, 1999). However, they only represent signed PFI/PPP deals and are only relevant if there is an immediate cessation of all prospective deals. Signed deals are a tiny fraction of projects under development and, assuming no policy changes and no change in the speed of approvals, a new stream of projects will develop annually between now and 2026. The financial commitment is more likely to be £415bn, arrived at by assuming that the rate of project approvals in the 1997-99 period continues until 2026. 

The cumulative impact of PFI/PPP revenue payments will mean future governments may have to raise taxes, impose charges for services which are currently free, reduce borrowing to finance remaining public services or cut spending in non-PFI/PPP services. “The future cash outflows under PFI/PPP contracts are analogous to future debt service requirements under the national debt, and, potentially, more onerous since they commit the public sector to procuring a specified service over a long period of time when it may well have changed its views on how or whether to provide certain core services of the welfare state” (Financial Times, 17 July 1997). 

The true cost of individual PFI/PPPs will not be known for 25-35 years when the first contracts terminate. Then all social welfare costs and benefits can be fully assessed. Government and business interests appear very concerned about the intergenerational burden of social policy commitments yet sign up to PFI/PPP projects with little regard for the longer-term public cost of PFI/PPPs.

There is no indication that PFI/PPPs are a temporary fix, indeed, quite the opposite as they are now embedded in third way ideology and government programmes. Those who use the logic of capitalism to claim that the state should not own facilities but simply finance and provide services are being economical with their analysis. The concept of the private sector owning and managing the infrastructure but stopping short of providing core services is untenable. PFI/PPPs are merely a half way position between public ownership and the total privatisation of health, education and social services. The concept of joint venture is not applicable because there is no pooling of resources - the public body withdraws from property and facilities management merely paying usage and service fees as a lessee to repay the private sector’s construction and operating costs. 
This leaves a smaller proportion of budgets to deal with other non-PFI/PPP services thus limiting an authority’s ability to respond to changing social needs and urgent priorities. 

6. Affordability gap - cuts in other services

Increased revenue payments committed to PFI projects frequently mean cuts in other services
Dartford example where three hospitals were closed to provide for the PFI hospital and after the new hospital opened the NHS Trust plans to close a community hospital
Impact on corporate spending priorities
The OBC for the Wakefield street lighting project showed a £729,000 increase in the annual street lighting budget (£18.2m over 25 years), a 35.3% increase on current expenditure.

7. PFI is subsidised by government 

Local government PFI/PPPs receive revenue support subsidy in the same way as if they were publicly financed projects - £800m per annum is allocated up to 2001/02. The NHS effectively subsidises PFI/PPP schemes through three mechanisms - capital charges (paying the same for a reduced asset base), the capital support scheme and diverting block capital funding to PFI/PPP schemes. Ten of the first wave NHS projects receive an annual subsidy of £7.3m because of ‘affordability’ problems (Gaffney and Pollock, 1999). Accountants Chantrey Vellacott have estimated that the private sector's higher cost of borrowing costs the public sector an extra £50m for every net £1bn of PFI contracts (Chantrey Vellacott, 1999). They also noted that an extra £10bn public sector three-year capital spending 1999-2002 would still leave the public finances well within the Maastricht convergence criteria.

The Scottish Executive is providing £13.8m per annum for the first seven years, increasing to £16.1m for the remainder of the Glasgow schools 29-year PFI contract, representing a third of the unitary payment for the use of the schools.

The Dorset Police Authority (Western Division) PFI project was approved by the Home Office in May 1998 with a PFI credit of £12.4m. Five months later it had increased to £24.2m.

8. High transaction costs 

Because each party has a battery of legal, financial, management and other advisers and consultants, fees are substantially greater than those incurred in market testing. Any disputes during a 25-year contract are likely to bring in another flurry of invoices from advisers.

* The adviser’s costs of the first fifteen NHS PFI hospitals were £45.2m, which consisted of £20.4m fees for lawyers, £14.6m for financial advisers and £10.2m for management consultants and other advisers. Adviser’s fees represented between 2.4% and 8.7% of the capital cost of the projects (Hansard, Written Answer, 28 February, 2000).

* The Home Office alone spent £5.3m on legal and accountancy fees between May 1997 and March 2001 for PFI schemes in the Prison Service and various IT projects (Hansard, Written Answer, 23 March 2001).

* The cost of public sector staff time in developing PFI projects and the cost of the procurement process is rarely taken into account. This means the actual transaction costs are substantially higher.

9. Public sector comparator flawed

The purpose of the Public Sector Comparator (PSC) is to provide a benchmark to assess the potential value for money offered by a PFI project. It is open to manipulation because PFI project teams want to ‘prove’ value for money and can do so by exaggerating innovation and benefits of a PFI option (and also ignoring the problems experienced by current PFI schemes) whilst assuming limited scope for innovation and efficiency improvements in the public sector. They also frequently underestimate the full cost of the PFI option. Costings are included without evidence to support them. Not surprisingly, the PSC regularly shows PFI projects to provide value for money. The public sector comparator has been described as ‘an invention’, ‘artificial’ and ‘biased’ (Sussex, 2001).

However, it should be emphasised that until the Treasury change the regulations to permit a full and comprehensive social, economic and environmental audit of public and private options, the PSC will remain a partial and ineffective method of assessment. 

The difference between the public sector and PFI costs may be marginal and could be reversed with a small alteration to the financial estimates.

* The PSC often assumes a worst-case scenario for the public sector cost calculations, for example, in estimating possible construction cost overruns and delays.

* The savings assumptions in the OBC spreadsheet may be inflated. For example, the Outline Business Case for the Wakefield street lighting project included ‘PFI savings” in four parts of the costings - the capital costs at 15% (or £2.4m over 5 years), ongoing capital costs of 15% (or £2.5m over 20 years), operating costs at 15% (or £3.8m over 25 years) and energy costs at 7.5% (or £1.45m over 25 years). The total PFI savings built into the PFI model were £10.15m, yet the difference between the PFI and PSC costs on a net present value basis was only £680,000. Minor adjustments to the costings would fail to prove value for money.

* The PSC may include cost estimates for risks, which are not actually transferred in a PFI contract. For example, the PSC for the Cumberland Infirmary PFI project in Carlisle included nearly £5m to pay for the risk of clinical savings targets not being met and £2.5m included for medical litigation. Neither risks were transferred but the net present cost of the public sector option was inflated by £7.2m (The Only Game in Town, UNISON, 1999).

* The PSC may also inflate the cost of risks transferred to the private sector.

* Failure to show savings required under Best value in the public sector comparator.

* Inflating the financial benefits of risk transfer.

* Under-estimating the cost of PFI advisers whilst assuming services will be subjected to frequent marketing testing in the PSC model at inflated costs.

* Under-estimating PFI monitoring costs and/or showing higher costs under the PSC model.

* Assuming ambitious supplementary income streams from advertising or third party use for PFI project, whilst not taking account of similar potential income under a public sector option. 

10. Privatising the development process: selling land and assets

Gaining control of surplus land and buildings (such as school playing fields, vacant land, empty hospital buildings and so on) for property development is a key part of PFI/PPP projects for the private sector. They often provide an important source of finance and profit, and ensure that surplus public assets are sold for private development.

Land and property deals are a fundamental part of PFI/PPP projects enabling consortia to develop ‘surplus’ land and building for commercial and residential use, but it may take several years for the value of these assets to be realised. Ownership of key development sites adjacent to new highways, airports and ports (particularly in developing countries) will increase the influence of transnationals in economic policy and direct foreign investment.  

Some PFI/PPP hospital developments have changed from a mix of refurbishment and new build on existing sites to large new complexes on out of town greenfield sites. Their physical form and financial commitments can distort health care planning. Patients and staff are forced to bear the additional travel costs and government has to finance road improvement, traffic and transport changes.
PFI/PPPs are not simply the replacement of public by private finance, but they ensure the privatisation of the development process, operational management, the disposal of surplus land and property, and in some cases, additional development generated by the initial investment. In fact, business is a vehicle for the longer-term privatisation of the core services of the welfare state. Supplying and managing the infrastructure on behalf of the state avoids having to create a private sector market in which individuals pay private insurance and fees. PFI/PPPs are a means of finance capital extracting higher returns from public services than they normally would by providing private capital in place of government borrowing and ‘contract capital’ ie transnational service companies and consultants securing long term contracts. They redefine ‘public service’ because they can remain publicly financed but privately delivered in privately-managed buildings.

11. Transforming the funding of capital expenditure

Local authority PFI schemes receive the same subsidy as public sector capital schemes via the Revenue Support Grant, controlled by central government PFI credits for approved projects. PFI credits were increased from £250m in 1997/98 to £800m in 1999/00.

Since the 1990, health service reforms, capital spending has been financed internally by NHS trusts having to make an annual surplus of income over expenditure equal to 6 per cent of the value of their assets (buildings and equipment) and to make a charge for depreciation through capital charges.  

Capital spending is heavily dependent on NHS trusts including capital charges in prices charged to purchasers, receipts from property and land sales, and NHS trust efficiency savings.

Before PFI/PPPs, public bodies planned and designed infrastructure projects, raised finance, supervised construction and then operated the facilities. The private sector were usually involved in the design and construction phases. However, financial and construction markets require PFI/PPPs to compete with other investment opportunities, and as the state becomes increasingly reliant (captive) on PFI/PPP projects, markets are likely to force up the cost of borrowing, construction and related costs. Furthermore, market forces will extend throughout the entire infrastructure procurement process. At the next economic crisis, public sector capital spending will again be cut and reliance on PFI/PPPs will be further embedded.

12. Changing nature of risk

The public sector has always borne the risk of facilities requiring adaptation as service needs change, of reletting or changing the use of buildings.  There are many different types of risk such as construction risk (completing new buildings on time), design risk (the way buildings are used may change), and technological risk (information and communications technology will effect how services are delivered and buildings used). The management of risk has become a profitable industry by packaging or commodifying different types of risk and creating new insurance markets. Partnership projects require the transfer of risk from the public to the private sector (at a cost of course) although the Hatfield rail crash highlighted the reality that the state always bears ultimate responsibility and that risk will never be fully transferred.

The accommodation or transfer of risk has become a central feature both for those who wish to maintain collective risk through universal public provision, and for the marketisers, who want to transfer certain risk, at a suitable cost, from the public to the private sector. 
The public sector has always borne the risk that public investment in new schools and hospitals will be adequate for the required level of future demand. Training adequate numbers of teachers and medical staff is another risk undertaken by the state. There are different types of risk such as design and construction risk (overrunning construction costs, adequate space and facilities), operational risk (escalating repair and maintenance costs), financial risk (failure to achieve rent, user fee or toll income targets, fluctuations in foreign exchange and interests rates); technological risk (equipment becomes redundant faster than expected), and residual value risk (value of the building at the end of the contract). 

Risk transfer involves identifying the different types of risk, allocating legal responsibility and pricing each element so that it can be recharged to the public sector. Risk is highest in the early years of a infrastructure project but decreases over time so that the later years provide continuous cash flows with declining risk. This is in sharp contrast to most industrial investment where product obsolescence and competition from other firms increases as a product ages. 

But, ‘risk’ has been commodified (made into a commercial product) so that it can be identified, priced and responsibility can be legally attributed. Long-term deals are currently being signed on a static concept of risk transfer. However, the nature of risk will change as the private sector gains increasing control of the infrastructure, delivery of support services and will be able to strongly influence (if not control) the supply chains of users, the growth of private services in ‘public’ facilities and third party use of spare capacity. Risk is identified, quantified, attributed and priced. In other words it is monetised. 

13. Lack of democratic accountability

The accountability of partnerships is a major issue. Companies and private non-profit organisations are generally accountable only to shareholders and directors respectively. Partnership often involves a dilution and merging of public, private and voluntary interests. Whilst a public body will have to maintain a commitment to matters of public interest, a partnership reflects negotiation and accommodation of different and competing interests. Some partnerships focus on the private and voluntary participants supporting the local authority or health authority to achieve its objectives. Partnership by desire is being replaced by partnership by necessity; “an ideology of partnership which seeks to direct important sectors of a capitalist economy collectively - in the public interest - but through privatised means” (Sternberg, 1993, p239). The concept of partnership implies that the state and capital are jointly concerned with the public interest and that either side can ensure that the other delivers its contribution.
Partnerships are sealed by contracts with companies, not committees. Most partnerships are cloaked in secrecy with limited democratic accountability. The state and private contractors collude to protect intellectual property rights using ‘commercial confidentiality’ to minimise disclosure, participation, assessment of deals and public accountability. In this context, partnership is little more than negotiated privatisation. 

At the same time as the state is shedding its responsibility to individuals (and to public sector workers) it is also intensifying its commitment to financial and service capital with long term multi-million pound PFI contracts. 
Democratic accountability is weakened by:

- The process of developing PFI projects, particularly in the procurement process.
- The disclosure of information with use of ‘commercial confidentiality’ used to limit the release of information and to constrain any representatives consulted.

- The accountability of advisers is limited. 
- Partnership boards usually have a few hand picked elected members and officers, together with private sector representatives (and sometimes independent representatives) which frequently operate as a cabinet committee and bound by commercial confidentiality.
- Negotiations between a preferred bidder and the authority are secretive behind closed doors
- Reliance on a contract to implement responsibilities which are open to challenge and high legal costs of disputes. The experience of compulsory competitive tendering in local government, market testing in the civil service and the NHS and the large central government ICT PFI contracts show that a contract is no guarantor of service delivery, let alone democratic accountability.
- Accountability of the project once it is operational is minimal

14. Service failures

The performance of the major computing PFI/PPPs has been less than successful. The catalogue of failures and cost overruns is summarised in Table 3. This provides evidence of project delays, cost overruns, service failures and a failure to transfer risk. In addition, 14 local authority housing benefit and revenue contracts outsourced to private contractors have caused havoc for service users, elected members and managers in 1999-2001. Five contracts have been terminated.

The Treasury has commissioned a report from the Office of Government Commerce to identify the savings and efficiency of contracting out (outsourcing). But there is a large body of detailed evidence of the impact of outsourcing and privatisation over the last 20 years.

15. Public sector lose control over assets and services

The treatment of PFI/PPP assets has been ‘clarified’ and should revert to public ownership at the end of the contract where it is in the public interest and when there is no alternative use for the asset (HM Treasury, 1999). However, this is likely to be only an academic matter because in 25-35 years time public sector capital spending may have almost vanished and public bodies may not have the capacity or political commitment to assume operational and managerial responsibility for facilities. In these circumstances, another PFI/PPP seems almost inevitable and facilities will be sold at residual value to the private sector. 

16. Private sector dictating social and public needs

The replacement of detailed outline/output specifications will inevitably mean that private interests and profit-making  squeeze out public need in the design and planning of public facilities. Public and community facilities will become business centres as the private sector seeks to maximise income generation and facilities compete for custom. It is galling for those who have long argued for community and multi-use of public facilities that it is suddenly ‘public’ policy but on business terms, controlled and operated by the private sector.

For example, Glasgow council decided to refurbish 26 secondary schools and build two new schools under a £1.2billion PFI project . However, the 3Ed consortium led by construction companies the Miller Group and Amey PLC, and funded by Halifax PLC, persuaded the council to change the scheme to 12 new schools and refurbishment of the remainder.

17. Two tier workforce transforming the labour process

The government and PFI/PPP consortia claim that the higher cost of privately financed projects will be more than offset by the private sector’s “better utilisation of assets” and increased operational savings. Facilities management contracts are intended to integrate services which have often been separately tendered. Increased productivity and financial savings from support services are a core requirement for the viability of most PFI/PPPs.

Another example of the pressure on wages was highlighted by the House of Commons Public Accounts Committee inquiry into the use of PFI/PPP in the prison service following the National Audit Office report into the Bridgend and Fazakerley PFI/PPP prisons. Richard Tilt, Director General of the Prison Service reported that “running costs in the private sector were 8%-15% lower although the public sector was slowly closing the that gap. He went on to point out that a security officer in a Securicor prison costs £14,000 a year for a 44 hour week, whilst an HMP Prison Officer costs £20,000 a year for a 38 hour week” (PAC, Evidence Session, 22 January 1998). On this basis, a private prison with 500 staff would be £75m cheaper over a 25 year period. The Prison Service submission showed the difference in staffing costs was greater than the total saving, thus proving that construction costs were actually higher than the public sector. Wage cuts do not, of course, represent efficiency gains but transfers between managers, shareholders and taxpayers depending on the form of privatisation and the type of service.

Most major cities and towns have a number of private finance/partnership projects in different parts of the public sector (for example, schools, hospitals, roads, regeneration, police and central government agencies) at different stages of development. The Private Finance Initiative is estimated to result in 150,000 transfers and 30,000 job losses between 1998-2007 (Association of Direct Labour Organisations, 1999). The cumulative effect of these projects will be more substantial than the comparative loss of CCT or market testing contracts by the same public bodies. 

These projects will have a wider impact on employment in each city. Local economy research studies have shown that a multiplier of between 1.15 and 1.24 is applicable to contracting situations and takes into account both jobs loss and the impact of reductions in terms and conditions (Centre for Public Services, 1995). For every 4-5 jobs lost in local government, a further job is lost in the local economy. 

The ‘commodification of labour’ is a technical term but increasingly effects public sector jobs. The government is keen to strengthen certain employment regulations so long as they increase the flexibility of labour and make the process of transfer from one employer to another easier, thus potentially reducing opposition to partnerships and privatisation. Public and private sector workers (jobs) are packaged to make transfer easier. The government has emphasised the importance of having a skilled and committed workforce but this has unfortunately been undermined by other policies, which promote the transfer of staff between employers. 

18. Impact on in-house services

Although the government has stated that in-house services may be involved in PFI/PPPs on grounds of efficiency, the greater the degree of in-house involvement, the less risk is transferred to the private sector. This means other risks will have to be transferred. Since PFI/PPPs are not limited to new building, contractors can take over services in other buildings on the same or other sites and the subsequent loss of work is likely to lead to the closure or sale of in-house services or Direct Service Organisations (DSOs). PFI/PPP consortia will be well placed to asset strip public sector in-house support service organisations across a city in the process of building their own facilities management operation.  The PFI/PPP also means that new/improved facilities are privately operated leaving the older ones under public control. Thus a process of marginalisation is set in motion with ever increasing disparity between the two sectors. 

As DSOs and technical service departments come under increasing pressure from PFI/PPP projects and the transfer of other services, it is only a matter of time before they are acquired by PFI/PPP consortia. The loss of further contracts would threaten the DSOs viability and help the contractor consolidate its market position. Some projects will primarily affect white-collar staff, some projects will affect mainly building repair and maintenance work, and others will affect the full range of support services. The combined impact of these projects on jobs, pay and conditions could be substantive. 

19. Best Value

In theory, PFI/PPP projects should be subjected to Best Value appraisal and consultation. In practice, Best Value service reviews are running in parallel with the procurement process. In other words, reviews are being used as part of the procurement process to prepare output specifications. Consultation with users is limited to agreeing the service standards to be incorporated into the Invitation To Negotiate, questioning the basis of the PFI/PPP project is not part of the agenda. The combination of a rigged Public Sector Comparator and a severely limited and distorted Best Value service review (in which the option appraisal has already been predetermined) are used to claim ‘value for money’.

A good practice approach to Best Value and PFI/PPP should include the following:

* If PFI/PPP proposals are included in service review option appraisals they should be fully assessed alongside public sector and other options.

* The service review must be able to justify a decision to use a PFI/PPP approach and must be subjected to District Audit and Best Value Inspectorate assessment.

* The entire PFI/PPP planning, procurement and operation phases must be subjected to Best Value consultation with users and community organisations, employees and trade unions and the wider community. This should be accompanied by full information disclosure.

* Best Value service reviews should not be run in parallel with PFI/PPP procurement.

* PFI/PPP contracts should include detailed proposals for the achievement of continuous improvement over the contract period including regular service reviews and monitoring of performance.

20. Refinancing PFI/PPP projects

PFI consortia are refinancing deals to substantially increase profits. For example, Group 4 and construction group Carillion almost doubled their returns from the Fazakerley (now Altcourse) prison contract. Profits increased by £14.1 million (75 per cent since 1995) of which £10.7 million came from refinancing (extending the bank loan period at reduced interest rate and early repayment of other debt), and £3.4 million from completing the prison ahead of schedule and lower construction costs. The Prison Service received £1 million for additional termination liabilities.
In early 2000, Morrison Construction packaged five PFI projects in a joint venture with Edison Capital, a financial services subsidiary of the US electricity company Edison International. It is the first example of bundling PFI projects and a step towards the creation of a secondary market.
Refinancing and a secondary market of PFI/PPP projects are likely to have an increasing impact on the scope and content of PFI/PPPs generally. The PFI/PPP lobby consistently under-estimates, or deliberately ignores, the power that international financial capital and market forces will ultimately have in determining the provision of public services. Yet marketisation means precisely that, with market forces having a powerful influence in the division of labour, risk allocation and the provision of core services.

Partnerships will accelerate marketisation and privatisation, creating an owner-operator industry which finances, builds, manages and operates the urban, transport and welfare state infrastructure. The construction company-led PFI/PPP consortia of the 2000s could be replaced by consortia dominated by financial institutions and private education, health and social service firms which could merge with facilities management firms to provide a ‘holistic’ service.  The more profitable PFI/PPPs will attract takeovers from other partnership consortia - the previous Conservative government were keen to encourage a secondary market in consortia. Those that struggle financially will also be subject to sale as parent companies seek to minimise losses. Public bodies will eventually have several PFI/PPPs operated by different consortia and contract rationalisation will inevitably take place. Ultimately, they enable the private sector to achieve economies of scale by merging projects across sectors. For example, a city which has three hospital projects, a portfolio of PFI/PPP school projects, several local housing companies, leisure, road and government agency projects will lead to rationalisation and job losses. 

Secondary trading in projects will reinforce the power of capital over the rentier state and will have profound implications for services and democratic accountability. 

Schools and hospitals will be traded like other commodities. Further and higher education mergers could lead to the vertical integration of secondary schools and the creation of one-stop-shop education. This would not only provide a feeder system, but also a satellite system of local or community ‘educational centres’ which could provide facilities for lifelong learning. Colleges and universities will be organisational ‘hybrids’, part public, part commercial companies which could readily participate in consortia. 

21. New form of contractor organisation

PFI/PPP has accelerated construction industry expansion into facilities management, extending the scope of the industry from design, construction, building maintenance to a wide range of support services.

Competitive tendering and market testing resulted in two forms of contract organisation, the private firm and the in-house contracting organisation with its own trading account. PFI/PPPs require the formation of a ‘special purpose vehicle’ or operating company, a separate company in which the construction contractor, financial institutions and facilities management contractor have an equity stake. This company manages and operates the facility including selling spare capacity and vacant space to third parties. The combining of finance, construction and support service companies into a new owner-operator industry has been warmly welcomed by the Confederation of British Industry.

22. Loss of public interest

There has been an erosion, or redefinition, of the ‘public interest’. In a climate of ‘partnership’ with a general political consensus about the role of private capital in the economy, policies and projects are approved with fewer fundamental questions being asked. Projects are ‘assumed’ to be in the public interest, or if private gain is transparent, it is approved because the public sector is getting something it needs. ‘Planning gain’ has been reduced merely to access to capital with no additional public benefit other than that which would otherwise have been provided by the public sector.

23. Long procurement and negotiation process 

PFI/PPP imposes a new and more complex procurement process in the public sector. PFI/PPP procurement is part tendering (to select a preferred bidder) and part contract negotiation, in which public bodies and PFI/PPP consortia and their advisers haggle behind closed doors. It requires public bodies to develop comprehensive project appraisal and evaluation methodologies and the ability to monitor large performance contracts to ensure contract payments are performance related, and that risk is fairly attributed between client and contractor. However, neither the public sector comparator (merely an investment appraisal), the Treasury’s Project Review Group criteria nor the National Audit Office best practice guidance refer to employment, equalities or environmental matters. 
PFI/PPPs extend marketisation of services far deeper and wider than competitive tendering ever could. It virtually eliminates in-house competition (on grounds that there is no transfer of risk if services remain in-house) and smaller companies (because of large long term contracts and equity capital in the consortia). Transaction costs are high (up to four times those of competitive tendering), but from the multinationals perspective, they form a useful barrier to market entry. They are ultimately funded by the public sector because they are absorbed into tendering prices and ‘the cost of doing business’. 

24. Shifting the balance between capital and the state

PFI/PPPs represent capital and the state forging a new relationship based on negotiated deals, long term service contracts, shared risk and guaranteed payments irrespective of the state of public finances. CCT and market testing were almost entirely labour only contracts but PFI/PPPs require the private sector to provide a capital asset, maintenance and a wide range of support services. Capital is further embedded in the planning and delivery of public services and extends the enabling model of government. 

The commodification of service provision results in social needs becoming subordinate to financial flows, stemming from usage or activity levels, user charges and income generation. The distinctiveness of the public sector is eroded to ease transferability between public and private sectors and the former is reshaped into a residual role. It is changing the state’s role in the provision of services, redefining ‘public’ service and ‘public’ employee and reducing its role from provision to underwriting, renting, procuring and regulating at an alarming rate.

The government claims that PFI/PPP are ‘services’ contracts, normally for local decision-making, but the Treasury ultimately controls approvals through the Projects Review Group. This is another example of the centralisation of decision making, which will be more extensive over the next decade if PFI/PPPs continue at their current rate. 

25. A new age of corruption

A new age of corruption and sleaze seems inevitable with a plethora of partnerships, joint ventures and non-accountable quasi-public organisations responsible for large sums of public and private money, despite the efforts of government to develop new codes of conduct. The key stages of the PFI/PPP process are negotiated between client and preferred consortia and advisers, which takes place behind closed doors under a blanket of ‘commercial confidentiality’. 

(Sources -

No comments: