[A-List] UK corporate state: PPPs

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

Once again, the Guardian to the rescue. Here's Charlotte Denny, likely
to succeed David Owen-advising Larry Elliott as economics editor, giving
the best justificatory gloss to public private partnerships. Not even
she can disguise the route which this particular development is likely
to take us down, however, since it is only a matter of time that the
"superior logic" of the private sector is entrenched further via the
transfer of assets lock, stock and barrel out of the state sector and
into the hands of corporations able to milk the provision of essential
services at taxpayers' expense on the back of state guarantees.


Privately financed revolution

The chancellor says using the PFI is a fiscal imperative. But even the
Treasury doesn't think that's all there is to it

Charlotte Denny
Thursday October 3, 2002
The Guardian

It was the ultimate threat to the Labour faithful. Learn to love the
private finance initiative, or you'll endanger the 550 schools and 100
hospitals Labour has started building since it came to power in 1997,
Gordon Brown suggested to a sceptical audience in Blackpool on Monday.

In an interview that morning in the Guardian, Mr Brown said the PFI was
the only way to pull in the new investment so desperately needed for
Britain's threadbare public sector.

"If we retreat from the PFI and still say that schools and hospitals
have got to be built, we will end up with the old quick fixes and
retreat into unsustainable borrowing," he said.

The threat cut no ice with discontented union delegates, allergic to the
idea of private money financing public investment. The conference voted
down the leadership to approve a Unison-backed motion calling for a
review of whether the PFI is proving value for money.

Part of the unions' distaste for the PFI is its chequered history. It
was invented by the Tories in the early 1990s, when public sector
borrowing was in danger of spiralling out of control, as a wheeze for
getting investment spending off the government's balance sheet.

Because the private sector was providing the finance up front and then
leasing back the assets to the public sector over the lifetime of the
project, large capital investments would no longer cause gov ernment
borrowing to balloon. It was the ultimate buy now, pay later scheme.

But the early years were a disaster. When Tory chancellor Kenneth Clarke
insisted the PFI option had to be explored for every new public project,
it became a further hurdle to building new schools and hospitals,
contributing to the precipitous decline in government investment under
the Tories.

Scarcely any PFI projects had made it off the ground when Labour came to
power in 1997, but that did not stop the incoming government from
enthusiastically embracing the scheme. Labour ended the universal
testing regime and simplified the contracting process, and by 2000, PFI
was starting to make an impact as public investment gradually turned
around.

But as the Institute for Public Policy Research points out, even now PFI
is a marginal factor in the government's drive to renew the public
sector. Last year it accounted for just 9% of total public investment.
Peter Robinson, the IPPR's chief economist, says the idea the government
could not have afforded new schools and hospitals without the PFI is
"economically illiterate". He says it's just wrong to present the PFI as
a free lunch from the City: it is simply an alternative and more
expensive financing method. As Louisa Was of the Bolsover constituency
said on Monday: "Of course we all want new hospitals. But you don't pay
the bill for your semi-detached on your Barclaycard. It's the same for
schools and hospitals."

The funding still comes from the taxpayer over the lifetime of the
project, and it will only prove a cheaper route if the firms make
significant efficiency savings.

"The argument about extra investment has been made in the past, because
if the private sector pays the capital costs up front then they do not
show on the government's balance sheet, even though they remain public
liabilities," the IPPR says. "This is little more than an accounting
trick: the public finances are no more or less sustainable than if the
scheme had been carried out in a traditional way."

In the short term, taking the financing of the PFI projects back into
the public sector would not endanger either of Mr Brown's fiscal rules.
The first allows him to borrow for investment purposes, while with
public debt now just 30% of GDP, the government has room to manoeuvre
under its second rule, which fixes a ceiling for indebtedness of 40% of
GDP.

Privately, Treasury officials say the PFI projects could be financed
conventionally without breaking either of these rules.

So why is the government so keen on it? The answer may lie in the
revolution Labour hopes to bring about in monolithic public services.
For the Treasury, the PFI is more than just a financing method, it is a
way of encouraging public sector managers to think about what they want
out of their new facilities.

The PFI is about the "outputs" rather than inputs of the public sector.
Instead of simply seeing the relationship with the private sector as
about getting a new building, managers are encouraged to think about
what services they want. Critics who say the new PFI hospitals contain
fewer beds than those they replace are missing the point: if that is so,
it is because it was the public sector which asked for fewer beds.

The Treasury hopes this approach will encourage better use of taxpayers'
money - the only real justification for the PFI. In theory, if firms are
funding the project themselves, they have an incentive to finish the
building on time and within budget, avoiding the delays and spiralling
costs that have dogged public projects in the past. By locking them into
long-term contracts to maintain and service the new facilities, the
government hopes they will design buildings that are cheaper and easier
to look after.

The point that firms can no longer wash their hands of a project when
the final roof tile is laid is often lost in the controversy over the
PFI. The Cumberland general infirmary, the first PFI hospital to be
opened, appears to have been a design disaster. But whereas in the old
days the construction firm would have charged the taxpayer more to fix
the faults; now they must fix them at their own expense.

This has no doubt made life easier for many a harassed headteacher who
no longer has to chase contractors to fix their school's central
heating. The firms are responsible on a day to day basis for maintaining
the facilities they have built. But the IPPR suggests that so far, while
private prisons have delivered significant savings for the taxpayer, it
is much harder to find evidence of greater value for money in schools
and hospitals.

The reason seems to be that the private sector is able to make more
savings if it operates the facilities it is financing rather just
designing and building them. While this is so in the prison sector,
resistance to the idea of the private sector paying teachers and doctors
has ensured that in education and health, the private operator has
control over only ancillary staff.

Although the government argues that the PFI route should only be used if
it can be proved to be better value for money, the evidence suggests
that when it comes to building new schools and hospitals, the PFI is
still the only game in town. All except 10 of the 100 new and
refurbished hospitals built under Labour are PFI projects, as are 500 of
the 550 new and cleaned-up schools.

If the IPPR is right, and the PFI is failing to deliver significant
efficiency savings in health and education, it is hard to see why so
many new projects are being commissioned. Peter Robinson says the
off-balance sheet nature of PFI financing means that public sector
managers are still behaving as if it is free money. To make the playing
field level, he argues, the government should put them back on the
balance sheet so that they account for the PFI in exactly the same way
as conventionally financed projects.

Meanwhile, for the unions, the efficiency savings of the PFI are a
mirage - the cost savings are achieved by screwing down staff wages.
Hence the demand by Unison and others that the government guarantee the
same terms and conditions for all workers, regardless of whether they
are employed by the NHS or private contractors. The leadership's
response was swift and brutal - party chairman Charles Clarke suggested
that union delegates who had inflicted defeat on the leadership were
representative of "producer" interests, not those of consumers.

The robust defence of the PFI by senior Labour figures this week
suggests the scheme is here to stay. Some think the real reason why the
government has learned to love the PFI is that it hopes it will help
bring about the changes it needs to show taxpayers that the massive
spending it is lavishing on the public sector is delivering results. It
may take a long time, however, to win over the party faithful.