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Saturday, 30 November 2013

Saturday, November 30, 2013 Posted by Jake 2 comments Labels: , , , , , , ,
Posted by Jake on Saturday, November 30, 2013 with 2 comments | Labels: , , , , , , ,

Private Finance Initiatives (PFI) were first used by the Conservatives in 1992, were enthusiastically embraced by Labour when they came into power in 1997, and continue to be cuddled and kissed by the coalition government of 2010. PFI involves the government entering into contracts with the private sector, where public infrastructure (hospitals, schools etc) are handed to the private sector for development and management and effectively rented back. A report by the National Audit Office (NAO) helpfully explains this:



"The private finance initiative (PFI) is a way to finance and provide public sector infrastructure and capital equipment projects. Under a PFI contract, a public sector authority pays a private contractor an annual fee, the ‘unitary charge’ for the provision and maintenance of a building or other asset. The unitary charge may also cover services such as cleaning, catering and security in relation to the asset."


Government ministers of all odour promised better services and greater savings from PFI. The reality, stated in a House of Commons Treasury Committee report in 2011 is very different:



"Private finance has always been more expensive than government borrowing, but since the financial crisis the difference between the costs has widened significantly. The cost of capital for a typical PFI project is currently over 8%—double the long term government gilt rate of approximately 4%. The difference in finance costs means that PFI projects are significantly more expensive to fund over the life of a project. This represents a significant cost to taxpayers."


The same Treasury Committee report complained that analyses justifying PFI contracts made unjustifiable assumptions without which the contracts would never have been signed. These included:
  • Understating the internal rate of return (IRR), i.e. the profit the private sector partner would extract.
  • Overstating the cost of the government simply borrowing money to pay for capital investment, instead of paying rent to a private sector partner
  • Underestimating the whole life cost of the contract.
  • Overestimating the cost of keeping the work in the public sector
  • etc. etc.

A seperate inquiry into PFI in 2011 by the Commons Public Accounts Committee heard that private companies do not only profit from government payments, but also from selling shares in the subsidiary companies they create to run the contracts. The evidence stated that while construction companies took an average 1.5% profit on their normal operations, they typically made 50% profit on selling stakes in the PFI companies they created to build and run public infrastructure:

MAJOR SELLERS OF PFI EQUITY IN UK BETWEEN 1998-2010 (BASED ON TABLE 5)
CompanyNo. of PFI
projects
Sale
value
(£m)
Profit
(£m)
%
Carillion plc24278.8 114.140.9%
John Laing22170.3 100.659.1%
Interserve plc1570.3 37.953.9%
Lend Lease Corporation11 14.711.578.2%
Costain Group plc837.1 16.242.9%
Serco Group plc779.9 16.020.0%
Balfour Beatty plc537.8 27.071.4%
Kajima Partnerships6 30.218.059.6%
Kier Group plc426.1 14.756.3%
Source: ESSU PPP Equity Database, 2011

Putting aside bumper profits the private sector made by selling PFI companies, Tory and Labour governments alike promised great operational efficiency and savings. A report by the National Audit Office shows this never happened. The biggest users of PFI were the Department of Health and the Department of Education:


Overall, the NAO reported remaining charges to be paid by the government departments on these contracts at £206.5 billion, and total savings at £1.6 billion = less than 1% saving.


The report commented on the Department of Health and the Department of Education thus:


The total reported signed savings of £174 million on health projects (including those reported prior to the start of the savings initiative) amounts to just one quarter of 1 per cent of the remaining unitary charge payments for operational PFI contracts in the health sector, which stands at over £69 billion.

 The total reported signed savings of £5 million on education projects (including those reported prior to the start of the savings initiative) amounts to just twohundredths of 1 per cent of the remaining unitary charge for operational contracts in the education sector, which stands at over £24 billion.


Significant savings were reported by the Foreign Office, who entered into just 2 PFI contracts, and HM Treasury who entered into just 1.


Savings obtained by the Department of Health are pretty pathetic. But they are ten times more than the Department of Education. The Department of Education is obliged to pay £24 billion on Private Finance Initiative contracts in the expectation of £2million of savings. A percentage so tiny it makes no mark at all on the above graph.

Even these "savings" are dodgy. As the Treasury Committee inquiry heard, the justifications for PFI involved exaggerating the costs of keeping contracts within the public sector. If the true public sector costs were used it is a matter for speculation how much of the 'savings' would disappear and reappear as 'losses'. 

On the other hand, with private companies expecting a return of 10% or more, we can be pretty certain that PFI put at least £2,400 million of profit into private sector bank accounts.

It seems that private initiatives, whether outsourcing or capital investment projects, do little more than put public money into private pockets.

2 comments:

  1. Public Accounts Committee reported in September 2014:
    http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news/report-pfi-waste-projects-defra/

    "The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

    "It is appalling that lax, poorly drafted PFI funding agreements to support the building of local authority waste processing plants have led to hundreds of millions of pounds worth of grants being made to three councils even though the main waste assets – such as incinerators – have not yet been built.

    Funding agreements with Surrey and with Herefordshire and Worcestershire councils signed by the old Department for Environment, Transport and the Regions, meant central government started paying grants to the local authorities as soon as the contractors began to deliver waste management services rather than waste management assets.

    The supporting PFI contracts signed by the local authorities did not require all of the expected assets to be constructed, resulting in £213.5 million in grants having been paid to the councils over the last 15 years with none of the main waste assets to show for it.

    Later, the Department for Environment, Food and Rural Affairs only altered its funding agreements with these councils in 2013 when the Department negotiated a £30 million reduction in its payments to Herefordshire and Worcestershire Councils, and a change in the timing of its payments to Surrey County Council.

    It’s scandalous that taxpayers in Norfolk have been left in the lurch and landed with a bill of around £33.7 million because the Department withdrew its funding for the Norfolk waste plant in October 2013. This decision was a contributing factor to the Council’s decision to cancel the contract the following year.

    The Department judged that the Norfolk plant was no longer needed to meet the 2020 EU landfill target, and yet it was fully aware of the likely compensation costs that would be incurred when it decided to withdraw funding. "

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  2. Has the scandal of 17 schools in Edinburgh closed since the end of the Easter holidays been reported outside Scotland? All were PPP/PFI Projects that the local authority was paying 1.5 million a week for.

    Now they are classed as unsafe because of serious building faults and pupils, many in senior schools who have exams in weeks, are being bussed round the city or taught in porta-cabins. I hope the local authority sues the firm concenred.

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