The state and local government

⁶⁸⁸

A sample of PFI schemes (excluding NHS projects) concluded that the current weighted average cost of private sector capital on PFI projects is one to three per cent higher than public sector borrowing.⁶⁸⁹ Another analysis of a sample of projects found that PFI/PPP financing was 11.2 to 18.5 per cent of the project costs compared to 3 to 3.5 per cent annual interest on publicly financed projects.⁶⁹⁰ Audit Scotland examined the overall financing cost for six PFI schools projects. This cost generally varied in the range 8 to 10 per cent a year, 2.5 to 4 per cent higher than a council would pay if it borrowed money on its own account for a similar project. The higher cost of capital added costs of between £0.2 million and £0.3 million a year for each £10 million invested in a project.⁶⁹¹ New Labour’s main justification for using private finance was that it provided value for money by transferring project risks to the private sector. However, of the 622 PFI deals signed by October 2007, the National Audit Office (NAO) had examined the relationship between risk transfer and risk premiums in only three.⁶⁹²

The NAO's study of housing PFI's, which was published in June 2010⁶⁹³, concluded that the Department for Communities and Local Government

• 
  has not routinely undertaken evaluation of its housing investment routes to help assess whether it is realising value for money and did not collect the data which would have allowed it to do so.⁶⁹⁴
  
• 
  Twenty one of the 25 projects which have been signed to date have experienced cost increases above estimates in the business case, 12 of which were over 100 per cent.⁶⁹⁵
  
• 
  All signed projects...were delayed and were signed later than was expected when the business case was agreed. The delays range between five months, and five years and one month, the average being two years and six months.⁶⁹⁶
  
• 
  The limited evidence available allowing us to compare PFI to alternative forms of procurement means the Department cannot demonstrate that the programme has achieved value for money.⁶⁹⁷
  

Hence New Labour’s justification for the policy was largely unevaluated and unscrutinised by Parliament, raising wider issues of public accountability for public expenditure. However, the attractiveness of PFI for New Labour remained strong because it takes the large debts involved off the government’s immediate public sector balance sheet as the initial capital outlay comes from the private rather than the public sector. This allows the Treasury to meet its self-imposed borrowing limits. However, as noted above, the move to International Financial Reporting Standards since April 2009 put the bulk of PFI finance on the balance sheet of the public authorities involved. Moreover, unlike the immediate debt, PFI does not transfer risk to the private sector. The taxpayer must still underwrite PFI projects because essential public services cannot be allowed to collapse. The taxpayer has already had to bail out private contractors running Railtrack, the Benefits Agency, Air Traffic Control, and the Criminal Records Bureau. Moreover, as Professor Allyson Pollock states, PFI is:

…overturning the rights and entitlements…citizens have enjoyed and paid for collectively through taxation since the inception of the welfare state. Markets and corporations plan for profit and not for need. The result will be widening inequalities in wealth and health and a return to fear.⁶⁹⁸
Meanwhile, despite the Julius Report recommending more privatisation, evidence is now accumulating that – as the crisis of state monopoly capitalism deepens – some local authorities are bringing back in-house previously privatised services. For example, research published by the Association for Public Service Excellence (APSE) in January 2009 revealed that the reason most commonly cited for insourcing was poor contractor performance, often accompanied by a catalogue of complaints from residents. There were cases where contractors tendered at a low price, but were not able to live up to what was promised. Low staff morale, due to poor terms and conditions and short-term contracts, also impacted on the quality of services; and dealing with contractors was found to take up more senior management time than anticipated. APSE focused on over 50 examples of insourcing where the benefits include greater accountability, enhanced performance, more flexibility and increased public satisfaction. Returning services in-house can also enable them to be joined-up more coherently and linked with wider strategic goals such as environmental considerations, improving community well-being and maximising local employment and economic development opportunities. For example, school catering in North Lincolnshire and Stockport, street cleansing in Southwark, building maintenance in Exeter, grounds maintenance services in Maidstone and waste services in Three Rivers and Oldham. APSE’s research also found that administrative services, such as revenues and benefits, are most likely to be returned in-house, followed by grounds maintenance, street cleansing, waste and recycling.⁶⁹⁹ Hence, as APSE’s Chief Executive Paul O’Brien emphasises, insourcing provides ‘a different angle’ to the debate on the delivery of public services from that of the Julius review, which: ‘Unsurprisingly...concluded with a recommendation for more of the same’ – that is, more outsourcing and privatisation.⁷⁰⁰

Nevertheless, as John Harris points out, the overall trend is still towards more and more outsourcing in response to the fiscal crisis resulting from the recession:

Even if health and education are protected from cuts, ‘efficiency savings’ in those areas will surely be the aim of whichever party wins the next election – and outside those two sacred services, the 16 per cent cuts forecast…by the Institute for Fiscal Studies point towards much more contracting out. No one, after all, offers help with scything down budgets more enthusiastically than the private companies now jockeying to extend their reach. In a recent news story in the Financial Times, the chief executive of the services giant Capita said he would be ‘deeply disappointed’ if its take from government doesn't double over the next five years, while the boss of the outsourcing empire Serco predicted that dire public finances mean ‘boundaries will get pushed back further’.⁷⁰¹
Government help was now on the agenda because the banks were increasingly unwilling to finance New Labour’s Private Finance Initiative (PFI) programmes, which as Professor Allyson Pollock states was
a potential disaster for Whitehall because most investment in public services is privately financed and there is no plan B….With the banks unwilling or unable to lend the capital to PFI deals, the government has signalled it might take on more risk by accepting a 49 per cent stake in financing the projects. But this undermines the government’s sole justification for the PFI policy, namely risk transfer….now that the risks have reverted back to the taxpayer, it is time to look at conventional government funding and restore public accountability.⁷⁰²
And New Labour wanted to kick-start the economy by hastening a Keynesian-style building and infrastructure programme using PFI. In February 2009, however, according to Hellowell, only 12 PFI contracts, with a total capital cost of £1.5 billion, had been signed since lending conditions deteriorated in June 2008, compared to £3 billion of investment in the previous six months.⁷⁰³ These 12 PFI contracts included the £200 million extension of the M80 from Haggs to Stepps, east of Glasgow, a £450 million regeneration programme in the London borough of Croydon, and a new £232 million Maidstone and Tunbridge Wells hospital. In November 2007, 33 schemes were in the PFI hospitals pipeline worth an estimated £4.5 billion. Latest figures show there are now just 10 schemes worth £2.7 billion. The casualties list includes the first PFI hospital project in Northern Ireland, which ran into difficulties after HSBC bank withdrew from financing the scheme. HSBC was to have co-financed the £267 million construction of the acute hospital in Enniskillen, Co. Fermanagh, with the Allied Irish Bank. But AIB is struggling in the recession and is due to receive a £2 billion recapitalisation investment from the Irish government. HSBC is also pulling out of all PFI projects in Europe. Important new buildings and infrastructure projects that have stalled include a £4.4 billion waste management project in Greater Manchester. PFI was also due to deliver a swathe of new GP-led health centres to expand primary care services in every part of England. Without these polyclinics, health minister the plan to shift care out of hospitals is under threat.

The PFI also delivers most of the £40 billion Building Schools for the Future programme initiative. And billions of pounds' worth of new waste processing and recycling facilities, which must be up and running by 2013 if EU targets on landfill are to be met, are also reliant on the banks. Failure to create these new waste facilities will result in significant fines for local authorities. However, the financial crisis has led to major changes in the way that funding is raised for projects. The US sub-prime crisis wiped out the commercial bond market, which had financed some of the largest PFI projects. Without the bond market, PFI is now completely dependent on banks hit by the credit crunch, which are currently unable to meet their capital adequacy requirements and are unwilling to lend to each other. As a result, the banks are now lending as "clubs" and are, to a large extent, able to dictate terms that have become less favourable as they seek to increase their profits. In some cases, the margin on top of banks' own borrowing costs for PFI projects has increased fivefold, to 2.5 per cent. Banking executives defend the rise as a welcome "correction" in the market, and they claim that the risk of lending to PFI projects is now much higher. In reality, however, the risks remain negligible. These schemes are backed by government – a huge advantage in the current economic climate – and returns to private investors and the banks are largely fixed over a period of 25-30 years.

In February 2009, as Hellowell also reported, the government was considering two "short-term" solutions
injecting public money into the scheme - and so transferring risk away from private lenders and back to taxpayers; and underwriting the returns to lenders to further "de-risk" PFI projects. But if this goes ahead, PFI will become a rather circular and confusing process, in which government-owned banks are lending to government, which then guarantees the returns to the banks - all to keep the investment value of projects off the books, but at a significant cost to the taxpayer.⁷⁰⁴
Hellowell again emphasised the potential for the new public sector accounting regime to kill off PFI:
In future, the Treasury will have a difficult task persuading ministers that they should deliver their investment plans through a PFI process that is increasingly slow and expensive. The Chancellor, Alistair Darling, could welcome the removal of accounting distortions and give departments genuine choice over how they finance projects, so that efficient decisions can be made.⁷⁰⁵
But evidence so far suggests that Darling took ‘a rather more cynical approach’ and restructured PFI ‘so that its balance sheet advantages’ were ‘retained.’⁷⁰⁶ For example, a number of NHS trusts, are already considering transferring land and buildings to specially created charities, effectively divesting themselves of their physical assets. New Labour Health ministers also transferred ownership of large chunks of community health facilities to the private sector by extending the Local Improvement Finance Trust (Lift) programme – the form of PFI used by primary care trusts. This undermined the long-established principle that PFI assets must not be privatised, but should be passed back to the public sector at the end of the contract.

Yvette Cooper – former Chief Secretary to the Treasury - on 3 March 2009 announced:

Government action…to ensure vital PFI infrastructure projects will go forward as planned despite current financial market conditions, so they can support jobs and the economy….In total, £13 billion of public investment in procurement will be safeguarded....including £3.5 billion of waste treatment and environmental projects, £3.1 billion of transport projects and £2.4 billion of schools projects….From today the Government will lend to those PFI projects that cannot raise sufficient debt finance on acceptable terms….It will also…where necessary…provide the full amount of senior debt required by a project. Funding will be provided from across Government, including initially from unallocated funds and Departmental under spends on previous projects. Equity investors will continue to bear the primary risk in these projects and, where available, private sector debt will continue to be provided.⁷⁰⁷
‘Retaining the PFI structure’, Yvette Cooper argued
will mean that the private sector will continue to bear the risk of cost over runs and delays….The Treasury will use professional lending skills, and intends to lend to projects only where appropriate funding is not available from the market. It will be a temporary intervention. As with normal commercial lending these loans will bear interest and will be repaid over the life of the project. The Treasury envisages, however, selling the loans it makes prior to their maturity when favourable market conditions return.⁷⁰⁸
Conversely, Dave Prentis – UNISON General Secretary – condemned New Labour for using public money to bail out greedy privateers who are walking away from the once lucrative private finance initiative (PFI) contracts:
Bailing out PFI now is just throwing good money after bad. Why doesn't the government see sense by building and running major public works itself for the benefit of the public, not to line the pockets of big business? Now that private finance has dried up, it is high time to make a clean break with PFI, end the vast profits these companies make at the expense of the taxpayer and return to publicly run, publicly funded schemes.⁷⁰⁹

The GMB’s study of the Treasury’s April 2009 signed projects list shows that British taxpayers are locked into £250 billion of payments on PFI assets worth only a quarter of that sum (£64 billion). Most of this cost does not appear on the public-sector balance-sheet. Nationally, there are now 641 PFI projects with more than a 100 new projects in the pipeline. British PFI debt is equivalent to £8,400 per taxpayer. And the debt mountain is likely to grow further, as private contractors demand above-inflation returns. Table 9.6 shows that Scotland is making the biggest overall loss. It has debts of over £30 billion on PFI assets worth £6 billion. That is equivalent to a PFI bill of £12,000 for every Scottish taxpayer. Wales meanwhile has the biggest debt balloon: it owes over 600 per cent the value of its PFI assets. In England, the North East has the highest PFI debt ratio at 553 per cent, with the West Midlands at 550 per cent and Eastern England at 527 per cent. The South East of England stands to lose nearly £23 billion on its 53 PFI projects, the West Midlands £16 billion, and London and the North West over £14 billion. The £5.3 billion PFI debt in Northern Ireland is equivalent to £7,325 per taxpayer. Private firms cannot raise funds as cheaply as the Government and the recession has increased the cost of private-sector borrowing. Therefore, as Brian Strutton – GMB National Secretary for Public Services – states:

We need to return to sound public-finance investment in public-sector projects. GMB calls on all the political parties to join us in declaring PFI bankrupt. We should stop any more PFI deals and bring others back into the public sector to relieve the taxpayer of the huge potential cost.⁷¹⁰
Table 9.6: Regional rankings by PFI debt per taxpayer (April 2009)

	Region	Number of PFI contracts	Capital value £)	PFI debt incurred (£)	Number of taxpayers	PFI debt incurred per taxpayer (£)
1	Scotland	98	6,125,120,000	31,242,310,000	2,510,000	12,447.14
2	London	90	25,310,790,000	39,540,710,000	3,600,000	10,983.53
3	North East	46	1,983,320,000	10,974,730,000	1,220,000	8,995.68
4	West Midlands	44	3,541,340,000	19,466,310,000	2,500,000	7,786.52
5	N. Ireland	33	1,360,620,000	5,281,250,000	721,000	7,324.90
6	South East	53	5,590,520,000	28,519,580,000	4,240,000	6,726.32
7	North West	55	3,342,550,000	17,541,450,000	3,180,000	5,516.18
8	Yorks& Humber	48	3,023,550,000	12,894,870,000	2,380,000	5,418.01
9	South West	46	2,470,290,000	12,898,210,000	2,530,000	5,098.11
10	East Midlands	36	1,990,460,000	10,328,780,000	2,120,000	4,872.07
11	East of England	32	2,464,330,000	12,996,300,000	2,790,000	4,658.17
12	Wales	29	638,010,000	3,942,340,000	1,360,000	2,898.78
	National	641	63,804,650,000	245,798,700,000	29,151,000	8,431.91

Source: GMB, December 2009

New Labour set up a Green Investment Bank with the government contributing £1 billion from ‘the sale of mature infrastructure related assets’ and sought to match this with £1 billion from the private sector. But, as Dexter Whitefield points out, Infrastructure UK is already locked into a narrow definition of “economic” infrastructure – water, waste, transport, energy and communications – which excludes "social” infrastructure such as education, health and housing and reflects World Bank, IMF and OECD neoliberal policies. Moreover, as most of Britain’s “economic” infrastructure is already privatised, this suggests that Infrastructure UK will be used to bail out the private sector. Hence:

Claims that PFI will grind to a halt because of the financial crisis are not based on evidence and whilst the Tories may rebrand the programme, the PPP industry...will continue in the absence of stronger opposition and alternative strategies....The Total Place programme could accelerate the development of new PPP models...⁷¹¹

Strategic service-delivery partnerships

A Strategic Service-delivery Partnership (SSP) is a long-term, multi-service, multi-million pound PPP between a local authority and a private contractor. Between 50 to 1,000 staff are transferred to a private contractor or seconded to a Joint Venture Company (JVC). The local authority usually has a 20 per cent stake in the JVC with the private contractor having the remaining 80 per cent. JVCs or Partnership Boards in Strategic Service-Delivery Partnerships
normally consist of council leaders, the chief executive, and a few service delivery directors plus a director and senior managers from the private sector, and report directly to the council’s Executive (Middlesbrough, Bedfordshire). A few make minutes available but many are secretive.⁷¹²
In most cases, secondary partners or sub-contractors do not have Board representation. Contracts usually last ten years with an option for a further five years; and cover ICT and related services such as revenues and benefits, financial and legal services, customer contact centres, human resources, payroll and often include property management. Some SSPs include architectural, highways, engineering and other technical services. SSPs are service contracts with relatively small capital expenditure for equipment and buildings. They are funded through local authority revenue budgets via monthly payments to a private contractor who may frontload investment and recoup the costs in the later stages of the contract.