Feature

Is this a good investment?

The government’s private finance initiative distorts NHS priorities, weakens democratic control and risks destroying the public sector ethos of the health service, warns Dexter Whitfield

The recent Budget confirmed the government’s public finance initiative as its method of choice for inflicting further cuts in public spending. As virtually all new public construction work is already carried out by private contractors, the PFI is simply another means of systematically privatising the design, finance, and management of public services. It provides a new vehicle, at public expense, for consultants and financial institutions to increase their fee earning, and for private contractors to obtain large, long-term operational contracts covering a wide range of services. In some cases they will even supply the entire service. It is another means of backdoor privatisation of the NHS.

Although all government projects requiring Treasury approval are now required to explore private finance options, until recently relatively few projects had been approved under the PFI since its launch in 1992. Shortly after the November Budget, the government published a £9.4bn list of ‘priority’ PFI schemes, although the Treasury has identified potential projects amounting to £27bn. Actual capital spending under the scheme is estimated to be somewhat less at £7.2bn over the next three years.

So how does the PFI work? Construction companies, consultants, financial institutions and facilities management contractors form a consortium and develop a proposal after projects are advertised by public bodies. Under design, build, finance and operate (DBFO) schemes, the entire design, construction and operation of the building or facility is carried out by the private sector. There is usually a two-stage tendering process in which outline proposals are assessed and three or four consortia are then required to submit detailed proposals. The consortium finances the design, construction and equipment and the government or public body leases the facility for a 20-35 year period. The lease payment in effect pays for the construction, management and operational costs. The consortium can also generate income from private patients and other users.

Although much is written about using private sector finance, little is said about the 20-35 year contracts awarded to contractors to operate services. This is fundamentally important in the NHS. It means that new or modernised hospitals under the PFI will be operated by private contractors. Although the government claims that it is not privatising clinical services, in PFI projects all hospital staff, except doctors and nurses, will be employed by a private contractor. In one of the first PFI schemes, in Grampian, a wide range of clinical services such as GP acute beds, long-stay geriatric beds, accident and emergency services and a full range of therapy and support services have been included.

The Treasury insists that all PFI projects must transfer risk to the private sector making contractors and financiers responsible for construction costs overrunning, escalating repair and maintenance costs, failure to meet income generation targets and adapting facilities for other uses if demands change. The other side of the coin is that the PFI will produce a stream of guaranteed profits for some contractors.

Such profits will be at the taxpayer’s expense. Private finance is more expensive than public, for a number of reasons:

• the government can always borrow at lower interest rates than the private sector, which has to be significantly more efficient to offset the higher financing costs;
• PFI schemes have additional packaging costs to consultants and advisers, these have recently been estimated to be at least 1 per cent of the total cost of the project for each tender submitted-four tenders could add 4 per cent or more to the cost of a scheme;
• the government is intent on transferring risk to the private sector, which is therefore demanding a high return, again leading to the higher cost of PFI schemes. An Economist article recently concluded that ‘the PFI may prove a terrible deal for taxpayers’.

Although the government claims that the PFI is a means of obtaining additional investment in the infrastructure, it only brought in £500m of private capital in a 28-month period to the end of the 1994-95, in contrast to a £2bn cut in government capital investment in the same period.

The government has also cut capital spending from £21.7bn in 1995-96 to £19.2bn in 1998-99. At this rate, the PFI will be hard pressed to replace cuts in government spending, let alone provide any additional investment. However, the government is hoping that the current initiative will build up momentum so that there is a large pool of projects which will enable deeper cuts in government capital spending in a few years time.

Private contractors will manage and operate services for 20-30 years once projects are constructed-long-term contracts by any standards. Contractors will be servicing buildings, providing support services, operating equipment and, in some cases, providing the entire service. This has far-reaching implications for public services because private contractors will effectively be controlling hospitals and other public services. A health minister recently stated that ‘private firms could run an entire district general hospital’ including clinical services but then claimed that this ‘is not privatisation of the NHS’.

Right-wing Conservatives have a clear view of the implications. ‘Taken to its logical conclusion, PFI is a much more radical challenge to the idea of the public sector than earlier economic reforms. Privatisation was a hiving-off of certain peripheral state activities, in essence stopping the extension of the public sector. PFI’s potential is greater in that it could dramatically alter public service ethos and management at its core. The injection of private finance, expertise and management in this area in time will strip the term public sector of any meaningful content since the government will merely be hiring private agencies to fulfil tasks formerly done by state employees’ (Barry Legg MP, Treasury and Civil Service select committee).

PFI projects will not be exclusively for public use. Private firms operating equipment and managing buildings and services seek to maximise their income generation, both by increasing private use and income from additional private services and/or user charges.

Guidance from the private finance panel executive makes it clear that ‘the fundamental purpose of the PFI is to secure the best possible utilisation of capital resources’. There are also references to obtaining the best value for money and its application not only in new schemes but also where there are ‘under-invested assets in the public sector’. In other words, if the private sector is cheaper, then this is the determining factor irrespective of how the PFI will dramatically change public services.

There is very little hard evidence concerning efficiency gains, precisely how much risk has been transferred, how much private capital has been raised and how PFI financing costs compare to comparable public sector costs. The full facts will only be known in about 25 years when those promoting PFI deals are unlikely to be around to take responsibility. Meanwhile, the PFI offers enormous scope for creative accountancy.

Once PFI schemes have been agreed, contractors will be in the driving seat. Commercial confidentiality will ensure that debate about the proposals will be severely restricted. And once the project has been completed, service delivery will be largely determined by the terms of the contract. This will lead to less democratic control and accountability over service delivery.

The focus of PFI is inevitably on new projects. Since all capital spending over £250,000 has to be assessed for its private finance potential this effectively means contractors are able to pick and choose which projects to develop; delays in getting new facilities, as projects have to be PFI vetted before work can start on a publicly financed scheme; projects are in effect being market tested; and the focus on new schemes will be at the expense of badly needed investment in the existing infrastructure.

The PFI is another way of fracturing trade union representation in the public sector. Many of the major construction companies and service contractors are opposed to recognition of trade unions for negotiating purposes.

Major construction companies have criticised the PFI:

• as a slow and bureaucratic process in getting schemes agreed and approved-only 26 projects were approved in the first year of the scheme;
• s a cover for cuts in public spending;
• for the high cost of designing and packaging PFI schemes.

The Federation of Civil Engineering Contractors report that the assessed tender costs of the first four DBFO road schemes were £36m. Contractors are therefore very concerned about who pays for the tendering process. The Labour Party ‘believes that there is a huge potential for public and private sectors to work in partnership’ and has made proposals regarding the PFI: the government would have a central role in deciding PFI priorities and must make clear its commitment to each project; it would streamline the decision-making process and broker agreements between public and private partners so that projects can proceed more quickly; it would also achieve a better division of risk between contractors, operators and investors.

These reforms are intended to speed up implementation of the PFI. They do not address any of the fundamental issues raised and will quicken the pace of privatisation of public services.

The need for investment in developing and renewing the economic and social infrastructure is unquestionable. But the PFI is not the answer. There is no real alternative to publicly financed public services. Government capital spending must be increased, not reduced. There is a role for private finance in major infrastructure schemes under strict conditions but public facilities such as hospitals and schools must be state financed, publicly controlled and operated by directly employed staff.

This is an edited version of an article which appeared in Public Service Action, the journal of the Centre for Public Services. CPS, 1 Sidney Street, Sheffield S1 4RG. 0114-272 6683.