The Sting

Repeated warnings that the Private Finance Initiative was an outrageous rip-off, dumping ultimate risks on the taxpayer, were ignored

By George Monbiot, published in the Guardian 17th January 2018


Again the “inefficient” state mops up the disasters caused by “efficient” private companies. Just as the army had to step in when G4S failed to provide security for the Olympics, and the Treasury had to rescue the banks, the collapse of Carillion means that the fire service must stand by to deliver school meals.

Two hospitals, both urgently needed, that Carillion was supposed to be constructing, the Midland Metropolitan and the Royal Liverpool, are left in half-built limbo, awaiting state intervention. Another 450 contracts between Carillion and the state must be untangled, resolved and perhaps rescued by the government.

When you examine the claims made for the efficiency of the private sector, you soon discover that they boil down to the transfer of risk. Value for money hangs on the idea that companies shoulder risks the state would otherwise carry. But in cases like this, even when the company takes the first hit, the risk ultimately returns to the government. In these situations, the very notion of risk transfer is questionable.

Nowhere is it more dubious than when applied to the Private Finance Initiative projects in which Carillion specialised. The Private Finance Initiative (PFI) was invented by John Major’s Conservative government, but greatly expanded by Tony Blair and Gordon Brown. Private companies finance and deliver public services that governments would otherwise have provided.

The government claimed that the private sector, being more efficient, would provide services more cheaply than the public sector. PFI projects, Blair and Brown promised, would go ahead only if they proved to be cheaper than the “public sector comparator”.

But at the same time, the government told public bodies that state money was not an option: if they wanted new facilities, they would have to use the Private Finance Initiative. In the words of the then health secretary, Alan Milburn, “it’s PFI or bust”. So, if you wanted a new hospital or bridge or classroom or army barracks, you had to demonstrate that PFI offered the best value for money. Otherwise, there would be no project. Public bodies immediately discovered a way to make the numbers add up: risk transfer.

The costing of risk is notoriously subjective. Because it involves the passage of a fiendishly complex contract through an unknowable future, you can make a case for almost any value. A study published in the British Medical Journal revealed that, before the risk was costed, every hospital scheme it investigated would have been built much more cheaply with public funds. But once the notional financial risks had been added, building them through the Private Finance Initiative came out cheaper in every case, sometimes by less than 0.1%.

Not only was this exercise (as some prominent civil servants warned) bogus – in some cases fraudulent – but the entire concept is negated by the fact that if collapse occurs, the risk ripples through the private sector into the public sector. Companies like Carillion might not be too big to fail, but the services they deliver are. You cannot, in a nominal democracy, suddenly close a public hospital, let a bridge collapse or fail to deliver school meals.

Partly for this reason, and partly because of the inordinate political power of corporations and the people who run them, governments seek to insulate these companies from the very risks they claim to have transferred to them. This could explain why Theresa May’s administration continued to award contracts to Carillion after it had issued a series of profit warnings. Was this an attempt to keep the company in business?

If so, it was one of a long list of measures designed to privatise profit and socialise risk. PFI contracts specify that if there is a conflict between paying the private provider and delivering public services, the payments must come first. However deep the crisis in the NHS becomes, however many people must have their cancer operations postponed or are left to rot on trolleys, the legal priority is still to pay the contractor. Money is officially more valuable than life.

If a PFI consortium is contracted to deliver maintenance and ancillary services, these non-clinical functions are ringfenced, while the clinical services delivered by the public sector must be cut to make room for them. This forces public bodies to respond perversely to a funding crisis: nurses might be laid off, but the walls will still be painted. Many of the contracts cannot be broken for 25 or 30 years, regardless of whether or not they still meet real needs: again, this insulates the private sector from hazard, leaving it with the public.

The risk lands not only on the state, but also on the people. Carillion leaves behind a series of scandals, such as the food hygiene crisis at Swindon’s Great Western Hospital, and the failings at the Surgicentre clinic it ran in Hertfordshire, revealed in a horrifying report in the Observer. Similar crises have attended many other deals with private providers: operating theatres flooded with sewage, power cuts which have left nurses to ventilate patients on life support by hand, school buildings falling apart, useless services continuing to be delivered while essential services are cut.

None of this was unforeseen. Some of us warned again and again during the New Labour years that this programme would prove to be an expensive fiasco. Even the Banker magazine predicted, in 2002, that “eventually an Enron-style disaster will be rerun on a sovereign balance sheet”. But the government didn’t want to know. Nor did the Conservative opposition, whose idea it was in the first place. Nor did the other newspapers, now scratching their heads and wondering how this happened. There is no joy in being proved right, just immense frustration.

Risk to a company is not the same as risk to those who own and run it. The executives keep their pay-offs. The shareholders take a hit on part of their portfolios, but limited liability ensures they can walk away from any debts. The company might disappear, but ultimately it’s just a name and some paperwork. But the risks imposed on the people – including the company’s workers – are real. We pay for these risks twice: first when they are nominally transferred to corporations, again, when they are returned to us. The word used to describe this process is efficiency.