Is the private finance initiative melting down?
By George Monbiot. Published in the Guardian 28th June 2005
For 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.(1)
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 £14million on lawyers, consultants, architects and miscellaneous money-wasting schemes, the National Health Service ditched its plans for a massive hospital in west London. The projected cost of the Paddington health campus had risen from £360m to £1.1 bn, while the number of beds had fallen from 1000 to 800.(2) This is pretty normal for a PFI scheme: in one case I’ve studied, beds fell by 20%, while costs rose by 1100%.(3) What makes this instance unusual is that the project was dropped before the money was spent.
On Wednesday, the government admitted that PFI projects for council house repairs had been a costly disaster.(4) This is hardly news to anyone who has been watching this programme’s seven-year meltdown.(5) But despite its admission, the government has not officially scrapped the policy: councils are still being told that they will receive no new money for refurbishments unless they hand their houses over to the private or voluntary sector.
On the same day, we discovered that the PFI computer system which 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.(6)
On June 17th, 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.(7) This is a photocopy of the Skye bridge bail-out: it was bought back by the Scottish Executive last year for £27m. A bridge which should have cost £15m has hit the public for £93.6m.(8)
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.(9)
On June 14th, 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.(10)
On June 10th, the National Audit Office published a report showing how the companies which 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.(11) It wasn’t as if the government didn’t know this was coming: in June 2001 a summary of leaked documents published in this column showed that this was going to happen.(12) The Treasury sat back and watched.
On June 9th, 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 which might become useless in five. “I’ve seen some awfully grand PFI schemes,” he warned, “that are starting to give us a real problem”.(13)
So what has the government learnt 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 in the future – a spokesperson at the Treasury says this is “commercially confidential” (14) – but it has already commissioned £3.6bn of new deals for this year.(15) According to a spokesman for the Department of Health, “The government has no intention of abandoning PFI.”(15) 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.”(16) Small? £42 billion has been officially committed so far.(17) 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”.(18)
Less true still is the Treasury’s assertion that there is “no bias in favour of any particular procurement route”.(19) As people working for NHS trusts and local authorities will testify, the government has 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.”(20)
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.(21) But the two costs are not compared: instead we are told we have a choice between rebuilding it with public funds or rebuilding it 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”,(22) 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.”(23) 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.(24) As the Norfolk and Norwich 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 Jeremy 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”.(25) And the record of the past three weeks is hardly reassuring.
1. Nick Kochan, 2nd August 2002. Is the PFI about to hit the buffers? The Banker. http://www.thebanker.com/news/fullstory.php/aid/224/Is_the_PFI_about_to_hit_the_buffers_.html
2. Mark Gould and John Carvel, 21st June 2005. Plan for super-hospital scrapped after eight years and £14m. The Guardian; Mark Gould, 15th June 2005. Watery grave. The Guardian.
3. This is the Walsgrave hospital, whose story is told in George Monbiot, 2000, Captive State: the corporate takeover of Britain. Macmillan, London. The figure later rose (from an initial £30m) to £330m.
4. Matt Weaver, 22nd June 2005. Government admits problems with PFI home repairs. Guardian online.
5. Eg, No author, 10th June 2005. Refurbishment PFI must stop. Inside Housing.
6. Andy McCue, 22nd June 2005. MOT computerisation PFI project delayed again. Silicon.com. http://management.silicon.com/government/0,39024677,39131366,00.htm
7. John Ross, 18th June 2005. PFI fiasco as public foots airport £33m bill. The Scotsman; BBC Online, 17th June 2005. Ministers ground airport PFI deal. http://news.bbc.co.uk/1/hi/scotland/4103178.stm
8. George Monbiot, 28th December 2004. A Scandal of Secrecy and Collusion. The Guardian. http://www.monbiot.com/archives/2004/12/29/a-scandal-of-secrecy-and-collusion/
9. Reuters, 15th June 2005. Government drops army tank training deal.
10. Grant Woodward, 14th June 2005. New mental health units ‘at risk from fire,’ says report.
http://www.leedstoday.net/ViewArticle2.aspx?SectionID=39&ArticleID=1054743; David Hencke, 17th June 2005. Private-finance hospital ‘putting lives at risk’. The Guardian.
11. The Comptroller and Auditor General, 10th June 2005. The Refinancing of the Norfolk & Norwich PFI Hospital. National Audit Office.
12. George Monbiot, 5th June 2001. Bleeding Us Dry. The Guardian. http://www.monbiot.com/archives/2001/06/05/bleeding-us-dry/
13. Cited by John Carvel, 9th June 2005. Hospital building scheme ‘mistaken’. The Guardian.
14. Conversation with press officer at the Treasury, 27th June 2005.
15. See Budget 2005. Corrections to tables C17 and C18. http://www.hm-treasury.gov.uk/media/C5A/E2/bud05_correction_c17c18.pdf
16. HM Treasury, viewed 25th June 2005. The Private Finance Initiative (PFI)
17. Conversation with press officer at the Treasury, 27th June 2005.
18. Allyson Pollock and David Price, July 2004. Public Risk for Private Gain? Unison, London.
19. HM Treasury, July 2003. PFI: meeting the investment challenge. HMSO, London.
21. George Monbiot, 2000, Captive State: the corporate takeover of Britain. Macmillan, London.
22. Alan Milburn, quoted in the Guardian, 4th July 1997.
23. Quoted by Nicholas Timmins, 5th June 2002. Warning of ‘spurious’ figures on value of PFI infrastructure spending. Financial Times.
24. See Allyson Pollock and David Price, ibid.
25. Quoted by Nicholas Timmins, ibid.