[A-List] UK corporate state: PPPs in disarray?

["Keaney Michael" <Michael.Keaney@xxxxxx>]

City falls out of love with the private finance initiative
After £20bn of business, the deal-flow has dried up and contractors
are as sceptical as unions of the funding scheme
By Saeed Shah and Michael Harrison
The Independent, 01 October 2002

One of the few things the City and the trade unions agreed on, for a
time, was that the Private Finance Initiative was a one-way ticket to
riches for the companies involved.

The unions see PFI as a way for the private sector to fleece the
taxpayer in the delivery of public services, undermining the jobs of
their members in the process.

The City loved the initiative, introduced under the Conservatives in
1992, not only because it promised bumper profits but it provided a
reliable and lengthy revenue stream. So during the Nineties the City
embraced the public sector, which started to provide some companies with
more than 50 per cent of their revenues. Companies like Serco, Amey and
Capita become the darlings of the City. Old-fashioned building
contractors were turned into sexy outsourcing specialists overnight.

Over £20bn worth of PFI contracts have now been awarded.

While yesterday's Labour Party conference showed that union attitudes
are unchanged, the City and contractors have undergone a dramatic change
of heart, questioning the attractiveness of PFI work.

Given the massive sums in PFI and the key public policy objectives
involved, this is a highly significant development. Deal-flow has dried
up, caught up in political anxiety and bureaucratic tardiness, which has
led to a huge escalation in bidding costs for contractors. Also new
contracts have reduced the profits that companies can make on PFIs. The
unions won't buy it, but PFI contractors are squealing with pain.

Bill Tallis, director of the Major Contractors Group, an industry
organisation, said: "PFI used to be high risk, high reward. Now it's
high cost and the rewards are being squeezed."

Amey's spectacular fall from grace is the most high-profile example of
the serious obstacles on PFI's path to riches. Amey shares were once
rated by the stock market at 30 times its annual earnings. That rating
is now about three times earnings. Laing almost went bust in building
the National Physical Laboratory under a disastrous PFI contract. Capita
shares now change hands at a third of the level of two years ago, after
its Public Private Partnership work, such as the £400m contract to run
the Criminal Records Bureau, generated enormous controversy and
criticism.

Amec, another major player, recently warned that, it was so frustrated
by the PFI, it was considering either doing less work under the scheme
or none at all.

Stephen Rawlinson, an analyst at Peel Hunt, said: "The companies have
shot themselves through the foot and the Government is not delivering as
many PFIs as expected. There has been a falling out of love with the PFI
in the City."

Under the PFI, public-sector infrastructure projects, such as new
hospitals, roads and schools, are financed, built and maintained by the
private companies or consortia. These are then "rented" back to the
state, over, say, 25 or 30 years. At the end of this period, the asset
belongs to the state.

Public Private Partnership is a broader term to cover collaboration
between the private and public sectors, where assets may not be
transferred to the private entity, such as the massive project to
modernise London Underground.

The main private-sector concern with PFI and PPP is the length and
complexity of the bidding process, which makes it a very expensive
exercise to bid for each contract, with no certainty of winning the
deal.

The bureaucracy is getting worse, not better, increasing bidding costs
to the extent that several players have publicly declared they must
compete for less work. This will lessen competition for PFI contracts,
seriously undermining the "value for money" case for the scheme. It
should be noted, however, that banks and those providing just the equity
for PFI schemes remain as enthusiastic as ever.

Bidding took about three years in the case of London Underground,
leaving the successful bidders with bills in the tens of millions (which
will be reimbursed by the state), after it was caught in a political
fight between the central Government and the Mayor of London.

Even after a company has been selected as "preferred bidder" for a
contract, the process can be torturous before a deal is sealed. Robert
McAlpine has been preferred for Colchester Barracks for three years,
while Gleeson was preferred bidder on a hospital PFI for five years.

Two main reasons exist why the bidding process has slowed down over the
last few years. The big issue is devolution of the PFI, as it has
evolved from its original role as a method of central Government
procurement. PFI has now expanded its reach enormously, to encompass
much smaller projects where it is a local public body that awards
contracts. There is a basic lack of experience and procurement skills at
local the government level and this is holding up projects, for years at
a time.

John Gains, the chief executive of John Mowlem, said: "The [central]
Government is not the sole client of PFI, it is also local authorities
and hospital trusts. These people are new to this process and are not
being guided by central Government. This has made it extremely
time-consuming and very bureaucratic."

It is no accident that the two PFI sectors usually cited as trouble-free
are roads and prisons, where there is a single central customer and
standardised procurement procedure. However, the Ministry of Defence's
central PFI procurement exercises are the glaring exception, being
universally condemned by bidders.

At the local level, public-sector teams are having to learn to complete
a PFI procurement from scratch, struggling to cope with the biggest
contract any of them will ever have handled. This means that bidders
have to tie-up dozens of their staff, for months or years at a time, for
each project being contested.

Brian Staples, the chief executive of Amey, said: "When it works, it
works very well.... But there are some problem areas and we have made
our criticisms known to the Government. I think most people would agree
that the Ministry of Defence is the worst of the lot when it comes to
PFI schemes awarded by central Government."

Amey, which has re-stated its PFI profits after accounting up-front for
the bidding costs, is selling its equity stakes in nine high-profile PFI
projects.

Despite the grandiose pledges of a massive increase in public investment
made by the Chancellor, Gordon Brown, over last year, PFI contracts have
slowed to a trickle. One consultant said this is due to "political
nervousness" after a union campaign against the scheme.

It is the process of PFI, rather than the concept, that has led to huge
frustration in the private sector. But given the massive sums up for
grabs, the private sector is not going to walk away from PFI work. Nor
will this Government return to traditional procurement, mindful of
running up public debt. The PFI is here to stay, but while the system
retains these serious flaws, the relationship between Government and
contractors is not going to be smooth.

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Delivering a better service or storing up a new Enron?
By Michael Harrison, Business Editor
The Independent, 01 October 2002

There can be few subjects quite as dry as the public finances but that
has not stopped the Private Finance Initiative from being at the centre
of controversy since it was first unveiled a decade ago by the then
Chancellor, Kenneth Clarke.

Supporters of the PFI argue it enables public investment that would not
otherwise take place to go ahead - in schools, prisons, hospitals,
roads, railways and the like. Moreover, it allows that investment to be
kept off-balance sheet, enabling the Government to stick to self-imposed
golden rules on fiscal restraint.

Funding public procurement projects through the private sector may be
more expensive. But, argue PFI proponents, this is more than compensated
for by the greater efficiency the private sector brings to bear and the
amount of risk transferred to its shoulders.

The opponents of PFI, and there are just as many, dismiss it as
government spending on the "never-never", at best a way of buying public
services on tick, at worst an Enron-style fraud on the public finances
which will come back to bite future governments.

They claim there is no evidence that PFI provides value for money, nor
that it successfully transfers risk to the private sector. What happens,
for instance, if a PFI hospital fails? Does it close or, more likely,
does the liability simply fall back on to the taxpayer?

The trade unions also argue that PFI means inferior terms and conditions
for employees.