Why, why PFI? posted by Richard Seymour

According to the BBC , these Private Finance Initiatve schemes are terribly good for business:

A Treasury budget report shows that the first £14bn of PFI deals signed will give the private sector a guaranteed £96bn return over 26 years but industry denies it is profiteering.

Business has tended to justify this in terms of the huge risks it is taking in embarking on such projects. This is creamier bullshit than the usual variety. Look at the number of crisis-ridden PFI projects, and see how many of the companies involved have been brought to heel: Pathway, the disastrous £800m project to automate post offices and provide a swipe-card system to pay welfare benefits; Nirs2 the national insurance system; the Child Support Agency IT contract with EDS; and the Passport Agency IT upgrade. Research by Standard & Poors, a credit ratings company, shows that PFI projects are usually low-risk for the companies concerned, while other research shows that returns are unusually high.

When companies like Jarvis do mess it up (their share value collapsed largely due to their involvement in the Potters Bar crash), they are bailed out by the banks. In fact, had the banks not thrown Jarvis a lifeline, the whole PFI system would have collapsed ignominiously, for Jarvis owns about 10% of the total value of PFI debt that the government has raised. The financial backers of the projects - like, for example, Abbey National - simply take their share of the cash and withdraw if something goes wrong. This is what happened to the Tower Hamlets' schools PFI project: the building firm involved, Ballast Plc, went under and so Abbey withdrew its backing for the project, and children are left with half-built schools. There is no law that compels companies involved to provide continuity of service, while the government backs a compensation scheme for profit loss in the event that the public sector cannot keep up its end. Further, the only inquiry into shareholder profits resulting from the scheme show that they have been 61% higher than those agreed in the PFI contract.

If the project goes well, then a local council can expect to be saddled with inflated debts for years to come. This is what happened with Coventry's two hospitals, the Walsgrave and Coventry and Warwick. Where there once was two hospitals, one on the outskirts and one in the centre, both have been demolished and now there is now one, rebuilt, on the outskirts - at an initial cost of £174 million. Where an initial refurbishment project would have cost approximately £30 million, it ended up costing £36 million per year over thirty years: that's over £900 million. This is perfectly typical - Allyson Pollock has shown that as soon as a private finance scheme is proposed, the price of hospital regeneration rises by an average of 72%, and from there the costs continue to soar. The only way to meet these costs is to cut provision - that is, to cut the number of beds and staff. This has also been replicated across the country.

Allyson Pollock et al have pointed out in the British Medical Journal that:

Cash can only be released by cutting services or by moving services to sectors where partial funding and user charges are practicable, or by redefining public services as private goods. Preventive, rehabilitation, mental health, disability, and long term care services continue to be withdrawn from the range of services available within the NHS, as does routine elective care.

David Taylor MP excoriated the government, noting that it did not raise any new money as the government claimed:

"Every penny raised for PFI schools, hospitals and prisons ... is paid for by the public purse, plus interest, plus profits."

Incidentally, once the hospital has been paid for by the public sector, the private consortium that built it will get to own it.

So, the question in the title is more than justified. This is a scheme that is neither cost-effective, nor does it reduce long-term borrowing requirements, nor does it produce reliable results. It also has the disadvantage of adding extraordinary costs and risks to any refurbishment or rebuilding programme that a local council might undertake. It reduces both the quantity and quality of the service provided. For a government that prides itself on pragmatism and prudence, this is a policy that astonishes in its fecklessness and recklessness.

The answer isn't easy to locate. The policy was designed by David Willetts MP, a very right-wing Conservative and head of policy coordination under Michael Howard. When Kenneth Clarke, then Tory Chancellor, first introduced the programme in 1993, he was assailed by Labour critics. Right up until 1996, the policy was savaged by frontbench and backbench Labour MPs as an unworkable sham. One of the reasons that so few PFI projects were issued by the Major government was precisely the opposition that it might provoke. Private sector firms were worried as well, since they would have to work with local councils which were increasingly falling into Labour hands. There were legal worries, too (don't worry, Labour sorted those out in its first year). Had Labour insisted on maintaining its opposition, the policy was dead in the water.

I would once have put it down to this government's extreme ideological disposition towards the private sector, but it appears that something more mundane was behind Labour's change of heart: Andersen Consulting. Paul Foot reported :

Andersen Consulting offered its services free to the Labour Party's Commission on Social Justice, set up by the Labour leader John Smith. The Commission was chaired by Sir Gordon Borrie, former Director General of Fair Trading, and a director of Mirror Group Newspapers, whose anti-trade union regime under David Montgomery was ushered in with the blessing of the Mirror's new accountants, Arthur Andersen.

...

On 12 May 1994, the day John Smith died, Andersen Consulting announced that its new director of research was to be Patricia Hewitt, Neil Kinnock's former press officer and deputy chair of the Party's Social Justice Commission.

...

In the summer of 1996, Andersen Consulting organised its biggest effort for the Labour Party. The entire team of prospective Labour ministers - about a hundred MPs - were ferried to Templeton College in Oxford, where they were treated to extended seminars by Andersen executives. The theme of the seminars was 'how to be an efficient minister'. No reference was made to efficient accountancy, nor did anyone explain why a group of unelected consultants whose partners had been banned from Government work by the Tory Administration were thought to be the best people to lecture Labour MPs on their responsibilities as elected ministers. Andersen Consulting have always insisted that these seminars were 'commercial': that is, that they were paid for - but no one has ever disclosed who paid, or how much.

Andersen went on to participate in and advise on those bountiful PFI projects, even after its Enron shenanigans were exposed.

No, it isn't strictly true that the entire Labour inner circle committed to PFI simply on account of its connections with Andersen Consulting, but it presumably didn't hurt either. Much more important was the background of importing SDP-style policies (along with a raft of former SDP stalwarts like Roger Liddle) and imposing them on the Parliamentary Labour Party, as well as on the country as a whole.

Party political broadcast: a Respect MP would strenuously oppose these stupid PFI schemes, argue for renationalising hospitals and schools concerned, as well as the imposition of a windfall tax on those companies who have profited from this crazy scheme. The money would be put into public services. Never mind the Tories - if you want to slash bureacracy and get value for money, vote Respect.