Socialist Worker

The great PFI swindle

by Simon Basketter
Issue No. 2588

It’s a long way from the partly built 40-mile £750 million Aberdeen bypass, work on which has been routinely delayed, to the £4 billion luxury development in Doha, Qatar.

But these construction projects, plus public-private partnership hospitals in Birmingham and Liverpool, meant the end of leading outsourcer Carillion.

Carillion’s collapse has put the whole sector under scrutiny. For example, Interserve is under government monitoring and its share price is diving.

Carillion boss Keith Cochrane claimed last year, “In too many cases, we were building a Rolls-Royce but only getting paid to build a Mini.”

In fact Carillion bosses got paid the cost of the Rolls-Royces many times over in order to keep speculators and shareholders happy. And they weren’t the only ones.

The Private Finance Initiative (PFI) sees private firms building hospitals, schools and roads instead of the government. It is part of an ideological attack that treats the free market as the solution to every problem.

PFI was designed to make it look as if governments were spending less than they were. In fact the deals are much more costly—as the government’s own spending watchdog admitted last week.

Construction

The National Audit Office (NAO) report lays bare the scale of the PFI disaster. It said PFI schools can cost 40 percent more to build and maintain than if the government simply did the work itself.

And it used research showing that privately financed hospitals typically cost 70 percent more than state-financed ones.

There are 716 PFI projects in Britain either under construction or in operation, with a total value of £59.4 billion. Future payments for existing projects are forecast to total £199 billion, an average of £7.7 billion a year over the next 25 years.

The NAO said even a number of Whitehall departments have complained of being trapped in schemes that they want to abandon. But they can’t afford the exorbitant exit fees.

Some eight out of 11 government departments have turned to consultants to reduce the huge costs, which is somewhat akin to pouring oil on the fire.

The watchdog said the private finance route “results in additional costs compared to publicly financed procurement”.

The Tories’ national infrastructure plan suggested in 2010 that capital raised through PFI cost 2 percent to 3.75 percent more than from state borrowings.

Yet the actual damning part of the report confirmed, “We have been unable to identify a robust evaluation of the actual performance of private finance at a project or programme level.”

In other words, nobody really knows what all this costs or how well or badly it works.

Outbreak

Governments pretend their decisions are open and subject to debate. But corporations seek to protect themselves, their decisions and their funds from public scrutiny.

Again and again PFI companies disguise their costs from the people who are partly, often mostly, funding them.

One consequence of the outbreak of bidding and tendering for contracts was an increased determination to encourage “commercial confidentiality”.

So, Carillion’s trading statement in December 2016, full-year results last March and an annual meeting update in May gave no hint of the troubles ahead. That this led to a profit warning last July and Carillion’s ultimate collapse last week does not imply fraud.

In fact, Carillion was bidding for contracts to cover its debts from previous projects. It was so crucial to win the new revenue that the tender price was pushed low, leading to soaring debt in a later phase.

But the bosses won’t pay for that crisis—we will.


Tory policy that won New Labour hearts

The PFI model of handing public projects to private capital began under John Major’s Tory administration in 1992. It was later enhanced by New Labour.

John Prescott, the voice of working class Old Labour, spoke to the 1993 Labour Party conference. He made it “crystal clear” that a Labour government would renationalise the railways if the Tories privatised them.

Prescott added that the PFI Birmingham relief road would be built “over my dead body”. He went on to preside over the privatised railways and gave the go-ahead for the Birmingham relief road in a Labour government.

Some 24 former Labour ministers ended up in the PFI industry. The theoretical regulators of corporate power became its champions.

Private companies are supposed to fund the construction of facilities and the state then pays for their use and management.

These contracts can see private firms reaping repayments for 30 or 40 years. Some 85 percent of payments last year related to procurement decisions made more than ten years ago when Labour was in office.

It is claimed that PFI limits capital expenditure and transfers risk to the private sector. It does the opposite.

Subsidise

Under PFI the private sector finances capital expenditure, in other words borrows the money for it. Firms get credit cheaply, though not as cheaply as the government could, because they are working on projects that are underwritten by the state.

So governments first subsidise the private sector, then the public sector funds the projects through annual payments to PFI consortia.

The initial cost to governments can appear small, which is why successive chancellors used PFI deals to build schools, hospitals and roads “off balance sheet”. This meant the projects did not count against their own public sector borrowing rules.

John Major singles out his next privatisation victim

John Major singles out his next privatisation victim (Pic: Chatham House)


Yet the total cost is enormous. Projects worth £13 billion cost the NHS £2 billion last year alone—or £3,729 every minute.

There is also the daft idea that for-profit businesses would bring market rigour to public works. Does anyone seriously believe that the key to securing the NHS is private capital plus competition?

Another self-declared advantage of PFI is that it displaces the risks of delays and overruns in building programmes onto the private contractors. And again, it does the opposite.

PFI contractors pitch low cost tenders in the hope of undercutting competitors—then squeeze costs wherever they can. This mostly hits workers’ pay.

For all the claims that PFI transfers risk to the private sector, private suppliers don’t like risk. So the market had to be made sufficiently attractive in order to entice them. That means there is no real competition, because it might frighten off investors.

The public sector continues to carry the ultimate risk. When private companies fail, we are left to bail them out. And by the time things go wrong, bosses have already made millions.

Carillion’s former boss Richard Howson received more than £6 million in pay and bonuses since 2012. It is obvious who benefits from PFI—private sector contractors, shareholders and investors. Winners include big banks, accountancy firms, construction companies and private equity firms.

The losers of PFI are ordinary people. And that’s when it works.


Shorts, spivs & speculators

As much as 80 percent of the profit made in PFI projects comes from refinancing. Firms trade on the debt to finance the project, assuming that they will reap the rewards from predicted future profits.

That’s when it’s going well. When it’s going badly, speculators can make money by betting against the company or “shorting”.

Investors borrow shares and sell them, hoping to buy them back for less, return them to the lender and keep the difference.

Ahead of the first of three profit warnings last July, more than 25 percent of Carillion’s issued share capital was out on loan. When the music stopped this week it was more.

PFI bankers and speculators are taking money from the public sector. There are winners and losers on the markets but when the game is rigged by PFI, we always lose.


Their debt and ours

As Carillion collapsed in debt last week another story about financial woe got much fewer headlines. This was a report from the Institute for Fiscal Studies.

It found that one in four of the poorest households are falling behind with debt payments or spending over a quarter of their income on them.

These debts won’t be written off. But banks started writing off Carillion’s debts before the firm announced its liquidation, according to analysts from CreditSights.

They said this meant banks’ losses “might not be as substantial as feared”. It’s not the first time the rich have been bailed out.

In 2008, following the financial crash, Britain’s government gave the banks £37 billion in cash and £250 billion in credit.

Worldwide, governments handed trillions to the banks—transferring their debts to ordinary people. If you’re rich and in trouble, capitalist states throw money at you to keep you rich. If you’re poor, you’re left to rot.


Locked into high prices and poor deals

The National Audit Office pointed out that some PFI providers are overcharging the public sector for insurance.

It said, “In one case the PFI firm eventually agreed to return over £100,000 of insurance savings after being unable to provide evidence that part of the saving should be withheld.”

lBristol Metropolitan Academy. The secondary school paid £8,154 for a blind because of its PFI contract. Under “lifecycle” costs written into some deals, schools can be locked into contracts that force them to pay high prices for small items.

lNewman RC College. This Oldham secondary school was charged £48 for security guards to open the premises so pupils could use the lavatory—each time.


Subcontractors who subcontract

Companies bid for schemes and then outsource the work as much as possible to escape responsibility.

After a firm bids to win a government contract, the whole process starts again as other firms bid to carry out sections of the work.

Carillion was made up of a number of companies but that wasn’t the end of the story.

For instance, Carillion sold Crown House to Laing O’Rourke in 2004. Drake & Scull has been owned both by Balfour Beatty and Carillion. Both companies were serial blacklisters of construction workers.

The aim of subcontracting is to produce a multi-layered false economy. As the number of participants in the market increases, so the opportunities for squeezing workforce costs are enhanced.

Wages are forced down. The responsibility for paying for training, holiday entitlements, sick leave and pension rights is displaced down the subcontracting chain onto workers.

Last week 30,000 subcontractors were waiting for money owed by Carillion. Some are small businesses but thousands are construction workers.

Work ground to a halt on all Carillion sites because no one knew who was funding the work or who they were now working for.


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