A Challenge to the Chancellor

Refute these charges, or admit that the private finance initiative is built on fraud and false accounting

By George Monbiot. Published in the Guardian 18th June 2002

Poor visibility corrupts; invisibility corrupts absolutely. The private finance initiative, which is the means by which billions of pounds of new public projects in the United Kingdom are now being funded, is doubly obscure: first because it is so complicated and appears so boring that few people have grasped its implications; secondly, because so many of the crucial details are hidden from public view by the blanket ban on disclosure known as “commercial confidentiality”. But slowly a few of them are beginning to emerge. As they do so, they confirm the gravest allegations the programme’s critics have made.

In January, this column suggested that public bodies were being forced by the government to rig the “public sector comparator”, which shows whether or not privately financed schemes offer better value for money than conventional funding. Now that allegation has been corroborated. Two weeks ago, Jeremy Colman, the auditor-general at the National Audit Office, revealed that some of the comparators being used are “utter rubbish” and “utterly irrelevant”. Public service managers know that they must show the government that their plans are cost-effective. “If the answer comes out wrong you don’t get your project. So the answer doesn’t come out wrong very often.”

They are rigging the comparators because the government has presented them with unreconcilable objectives. On the one hand it has told them, in the words of Alan Milburn, the secretary of state for health, that “it’s PFI or bust”: the only money the government will allow them to receive is money provided by the private sector. On the other hand it has insisted that private finance can be obtained only if it offers better value for money than public funding. Public servants are forced, in other words, to prove that private finance works.

To help them out, the government has provided them with a means of falsifying their figures. It’s an accounting device called “risk costing”. In principle, when a consortium of private companies agrees to build a hospital or some schools for a public body, it acquires the risk that the project might fail. This risk is “costed” and becomes a key component of the value-for-money calculations.

A recent paper by the Association of Chartered Certified Accountants (ACCA) warns that the costs of the principal risks (such as unanticipated expenses) have been exaggerated. The average cost overrun on public hospital building projects, for example, is 7%. The private operators are allowed to claim a “risk” of 12.5%, and this is likely to rise as a result of new guidance from the Treasury. By contrast, no risk costing whatsoever is added to the public sector comparator.

Last month, the British Medical Journal published a paper showing how this “risk transfer” has been used to distort the results. The government’s own figures reveal that before “risk” was taken into account, the new hospital schemes the researchers studied would all have been built far more cheaply with public funds. When the “transferred risks” were costed, however, they were found miraculously to tilt the comparison in favour of private finance, in several cases by less than 0.1%. Reading these figures, it becomes plain that the hospital trusts started with the desired results, and worked backwards until they found a risk costing which matched them.

Ultimately, of course, even if the risk was assessed realistically, the entire exercise is a sham, for, rather than allow a public service to collapse, the government will bail out the private consortium which runs it, as Railtrack, the Channel tunnel builders, the passports office and the benefits agency have discovered.

Fraudulent risk costing is not the only means by which private finance is made to look as if it works. As the ACCA points out, the government allows public bodies to reclaim the VAT on privately funded projects, but not on publicly backed schemes, thereby favouring private finance by 17.5%. NHS trusts have to pay the Treasury a 6% “capital charge” on the buildings they own. Private builders have no such obligation. The government gives local authorities an annual grant of 11.5% of the value of the PFI schemes they commission, but there is no corresponding sweetener for publicly-funded projects. Private financiers are permitted to use “discount rates” way out of line with inflation.

This false accounting masks the appalling value for money offered by private finance. As the BMJ report shows, 39% of the price of PFI hospitals is incurred by the extra cost of borrowing. Governments have a better credit rating than corporations, so they can borrow more cheaply. As interest is levied across the 25 or 30 years of the project, small differences in rates contribute vastly to the cost.

So why is the government forcing public bodies to fleece the taxpayer? In 1997, it claimed that the purpose of the private finance initiative was to reduce government borrowing. But PFI does not reduce borrowing: instead it defers and extends it. In opposition, Labour was keenly aware of this deception. Alastair Darling, for example, observed that “apparent savings now could be countered by the formidable commitment on revenue expenditure in years to come.” Mr Darling is now transport secretary, partly responsible for implementing Britain’s most controversial PFI scheme: the handover of the London Underground. The public budget, moreover, has been in surplus throughout Labour’s term in office: all our privately financed schemes could have been funded many times over from public accounts.

This also disposes of the next excuse the government made for PFI: that it can commission more projects by this means than by public funding alone. Now ministers tell us that PFI makes sense because private managers are more efficient than civil servants. Unfortunately, the available evidence suggests that while they are extremely efficient at making money, they are rather less efficient at running public services. The first few PFI hospitals to open have all been beset by disasters caused by cost cutting: the Cumberland, the North Durham and the Hairmyers hospital in Strathclyde, for example, have been repeatedly flooded with sewage as a result of inadequate drainage systems.

So only two possible explanations remain, neither of which could be said to reflect well upon this government. The first is that it is appeasing the corporate lobby groups whose members are becoming wildly rich at public expense. The second is that it is deferring costs it would otherwise carry to future governments, enabling the Chancellor, paradoxically, to sustain his reputation for prudence by maintaining a vast budget surplus. If the maturation of the schemes this government has commissioned coincides with either a recession or a serious budget deficit, then PFI has the potential to bankrupt the United Kingdom.

This article contains nine serious and specific charges of public fraud and false accounting, commissioned and directed by the Treasury. So, as there is no other means of holding the government to account on this issue, let it take the form of a challenge. If any of these charges is false, the Chancellor of the Exchequer can use these pages to repudiate them. If he fails to do so, our readers should conclude that he has no defence to offer.