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Scottish Trade Union Research Network
Fifth National Seminar University of Abertay, Dundee, 12 February 2002

Private Finance in the Public Sector

Private Finance Modernisation or Manipulation?

Dave Watson

Introduction

Much has been written and spoken on the need for modernisation or reform of public services. This paper looks at the modernisation agenda in Scotland and one key aspect of that strategy the use of private finance. It then examines how private finance and in particular the Private Finance Initiative is manipulated to privatise Scotland's public services.

Modernisation?

Given the often contradictory messages from the UK government and the Prime Minister in particular, it might be fair to ask just what the government at UK and Scottish levels mean by the modernisation of public services.

The grand vision is set out in Labour's 2001 manifesto;

"Labour's ambition for public services is simple: we want excellent services for all. Our challenge is to reverse decades of denigration and under-investment. We will work with frontline staff to deliver a revival of our public services every bit as profound as the changes to the private sector in the 1980's." 1

Following a recent speech by the Prime Minister public service workers could be forgiven for questioning if "the decades of denigration" have come to an end and references to the "private sector in the 1980's" are to say the least ambiguous. The Cabinet Office has sponsored a series of projects by the PIU on issues of public service reform covering better policy delivery, leadership and satisfaction with public services 2. Laudable though these projects are they don't appear to establish a clear strategic direction.

In Scotland Jack McConnell (as Finance Minister) launched the Scottish Executive's strategic vision for modernising government in December 1999 under the banner 21st Century Government3. This has resulted in a range of projects, largely funded through the Modernising Government Fund. Most of the projects encourage innovative use of information and communication technologies. These projects emphasise the importance of a "customer service culture" which is a somewhat limited vision for public services. I would argue we should be promoting 'citizenship' not 'consumerism', a concept which has the heady resonance of Lady Thatcher's immortal phrase "there is no such thing as society".

The emphasis also appears to be on "delivery" or as Douglas Fraser in the Sunday Herald put it "Jack's . annus deliverus". Others have argued "that it is not the management tools that are lacking in government, it is the strategic intent"4.

The Modernising Government launch also described some key themes including partnership, openness and accountability, inclusion and delivery. These are broader themes around which some consensus and strategic vision could be developed. It is not the function of this paper to explore this in any depth but other principles that reflect a public service ethos could include:

  • Selflessness
  • Integrity and honesty

  • Objectivity

  • Participation and involvement

  • Transparency

  • Equality

  • Competence

  • Valuing staff

  • Integrated management and structure

Others have expanded similar principles into a new Public Service Management concept5, which could offer the basis for the sort of strategic direction, that public services in Scotland badly need. An approach which fully rejects the neo-liberalism of the Tories and steers a new path between the privatising tendencies of some third way gurus6 and statist command and control approaches to the provision of public services.

There is a real risk that some claimed modernisers are falling into the neo-liberal trap of denigrating public services, supporting disinvestment, restructuring and eventually privatisation. This is why the issue of private finance is so important to the big business interests who promote PPP/PFI. Whitfield illustrates this appraoch with his model "The spiral of public sector decline and opportunity for capital".

Private Finance in Scotland

Public Private Partnerships (PPP) is the umbrella name given to a range of initiatives which involve the private sector in the operation of public services. The Private Finance Initiative (PFI) is the most frequently used initiative and has specific Treasury rules that have to be followed. The key difference between PFI and conventional capital procurement is that the public does not own the asset. The authority makes an annual payment to the private company who provide the building and associated services.

The Labour Government inherited a substantial commitment to PFI in Scotland. Since the launch of PFI in 1992, Scotland has been a lucrative home to PF1 with schemes exceeding £2.5bn in capital value and much more in the pipeline. This is reflected in almost all of Scotland's public services.

Local Government is the largest growth area for PFI, most recently in schools thanks to substantial Scottish Executive encouragement including financial subsidy. Water is the second largest user of PFI. After a successful campaign against Tory privatisation, it is a Labour Government who will privatise Scotland's water through the back door. The NHS until recently has been the major focus of PFI in Scotland through flagship projects, including Edinburgh's Royal Infirmary and in Lanarkshire the replacement for Law and Hairmyres Hospitals. The emphasis has recently shifted to a range of smaller schemes.

There is some evidence that that with the exception of schools the enthusiasm for large scale PFI projects has waned in favour of broader Public Private Partnerships (PPP). These have the perceived advantage of even less public scrutiny.

Manipulation

The current rationale for PFI emphasises value for money to the exclusion of other issues. This is assessed by using a notional Public Sector Comparator (PSC). As all schemes have to demonstrate that they are better value than the PSC it is claimed that PFI represents value for money. However, the methodology for assessing value for money is complex and does not always constitute a fair comparison. In practice where conventional finance is not likely to be available there becomes a perception that PFI is "the only game in town". However, if a scheme were presented to the Scottish Executive on that basis it would have to be rejected under PFI rules. This leads officials to engage in the manipulation of the PSC. The main methods used to manipulate the PSC are set out below.

Discounting

The discounting of future cash flows places a higher value on expenditure in earlier years and a lower value on expenditure in later years. This has a disproportionate effect on the PSC as PFI options are spread over the entire period of the contract, meaning that the total Net Present Cost (NPC) is shown as lower than the PSC. In cash terms, without discounting, PFI options are almost always more expensive.

Refining the PSC

There is evidence from a number of schemes analysed by UNISON that the PSC is refined after bids are received from the private sector. A variety of methods are used most of which are highly subjective but all have the effect of either increasing the PSC or reducing the PFI estimate. Often as in the case of the Royal Infirmary these are not 'like for like' comparators.

Risk Transfer

This is the most common method of justifying PFI schemes. In the Glasgow schools scheme the PSC was £35m cheaper than the PFI option. However, with virtually no justification £70m was added for the notional value of risk transfer. Despite the council underwriting the loan and other risk factors.

Lenders test projected PFI payments to see how much cash is available for debt service each year and how this compares with the debt service payments to be made. A study undertaken by a credit rating agency for UNISON on the South Tees NHS Trust PFI scheme estimated that it would require a 20% reduction in the availability payment throughout the life of the contract before the PFI company would be unable to meet its senior debt service obligation. In practice this is unheard of and therefore there is little risk to the lender. This is not surprising. Lenders are not in the business of taking risks. If they did there would be a premium.

Termination Costs

One of the most bizarre provisions of PFI schemes are that if a contractor defaults it is the public authority that has to compensate the lenders. This is justified by the Treasury on the basis that the authority could make windfall gains through contract termination. However, it impacts on the value for money comparison as lenders can provide funding to the PFI company knowing that their money is safe. Authorities on the other hand would have to make high compensation payments and therefore are very unlikely to terminate a PFI contract, even if the contractor blatantly fails to meet its obligations.

Affordability

In local authority schemes it is often claimed that schemes are revenue neutral. This means that the cost is made up of PFI credits from the government for the capital element with existing revenue budgets funding the services. Similar claims are made under other public sector funding arrangements. The absence of transparency in most schemes and the presentation of the figures means that it is difficult to assess the validity of the revenue neutral claim.

We do know that in a number of schemes the health trust or local authority have had to either fund the difference out of other resources or reduce the services to be provided. In hospital schemes this is usually done by reducing beds (on average by 31%) and in schools by cutting back facilities. In the Glasgow City Council schools project the charges for accommodation in year one grew from £24m in the feasibility study to £36.7m in the Full Business Case (FBC). Seven swimming pools are to be lost along with classrooms and staff common-rooms. The original requirement for refurbishment of 26 schools and the construction of two new schools changed to the construction of 12 new schools as this would be more profitable for the construction company.

Accountability and Transparency

A key element of the modernisation of public services ought to be a more transparent and accountable service. Private finance undermines this objective by hiding almost everything under a cloak of secrecy.

Local authority and quango board members are rarely presented with the financial information in a form that makes clear the true underlying costs of PFI schemes. Authority members cannot make informed decisions on the basis of NPCs or NPVs. They need to be shown the projected annual cashflows, which are the only basis upon which affordability can be judged. As one council Scrutiny Committee put it "What we need to know is what it is going to cost in hard cash and can we afford it".

In June 1999 the Minister for Finance announced that Full Business Cases (FBC) for schemes signed after that date would be made publicly available. This followed arrangements for greater openness in NHSiS schemes. UNISON welcomed this announcement although there are two main gaps. It does not cover schemes signed before June 1999 and even new schemes are only publishing sanitised versions on the spurious grounds of 'commercial confidentiality'. In addition publishing an FBC after the decision has been taken is a totally inadequate form of user involvement.

Even Pathfinder schemes such as Falkirk Schools have not been published and therefore have not been subjected to public scrutiny. Requests, even from the local MSP have been refused with no adequate reason given. The current round of schools PFI bids have included at best the partial publication of the OBC and at worst four page summaries or the OBC with all figures tippexed out! No water industry scheme has been published. If these schemes represent genuine value for money then why the secrecy? I would suggest that the officials concerned have seen published schemes analysed by UNISON and others and they do not want to face similar scrutiny.

It is also the structure of PFI bids which limits public and staff involvement. In a conventionally financed project staff and users can be involved in the specification at an early stage. However, in PFI schemes bidders can propose different solutions which they claim cannot be shared with staff and users on the grounds of commercial confidentiality.

UNISON Scotland has argued that there should be disclosure and full consultation on PFI proposals with key stakeholders - trade unions, employees, users and local community representatives - before any decision is made to opt for PFI. This consultation should continue throughout the PFI process. All documents should be publicly available and if any information is withheld the public authority should be required to give a full explanation for non-disclosure rather than hiding behind 'commercially confidential'. In practice there is very little pricing information in PFI schemes which falls into this category as PFI bids do not require the detailed cost sensitive data that private companies use to calculate their bids. This approach would represent a true modernisation of public services.

Treatment of Staff

Modern public services should also be judged on their employment standards. Well motivated public servants are the key to the quality of service provided to the public.

After the taxpayer (who finances the extra cost of PFI) it is usually low paid women workers who suffer the main consequences of PFI when they are transferred or are subsequently employed by PFI companies.

Following recent government policy changes staff transfer should only take place where it represents value for money. This contrasts with the previous position where there was an assumption that all workers classified as 'non-core' would automatically be transferred. This is known as 'PFI without People'.

In the NHSiS and to a lesser extent in the water industry this policy change has been communicated and is understood, if not always applied. However, in local authorities this policy has not been followed. For example in the Glasgow Schools scheme government policy was ignored and councillors were told that staff had to transfer to achieve the necessary risk transfer. The same approach is being applied by local authorities in the current round of schools PFI bids.

It would appear that this is partly to achieve 'off -balance sheet' treatment of PFI schemes which authorities wrongly believe is necessary to gain approval for schemes. Treasury ministers have made it clear that PFI is not to be used to hide borrowing and this follows the revised Accounting Standards Board (ASB) guidance on PFI in 1999. It is therefore essential that the Scottish Executive makes it clear that accounting tests of whether a PPP/PFI project is on or off balance sheet are not relevant to the assessment of whether or not a project should go ahead.

Whilst much has been made of the provisions of TUPE and the current review of the regulations, it is clear that this is insufficient to protect staff in PFI transfers. Many issues including adequate consultation, pensions and the two-tier workforce are not covered by TUPE. UNISON has therefore proposed that the Scottish Executive adopts a comprehensive staffing framework for PPP/PFI schemes and a draft framework has been prepared.

The pressure to pursue 'off-balance sheet' schemes has encouraged the unnecessary transfer of staff. There are a growing number of examples where following proper evaluation it is possible to show that retaining services in-house represents better value for money.

Conclusion

At the start of this paper I referred to the Scottish Executive's vision for modernising government as articulated by Jack McConnell in December 1999. The key themes were partnership, openness and accountability, inclusion and delivery. I have sought to demonstrate that the extensive use of private finance is incompatible with this vision.

Partnership working is difficult to achieve when the staff team is broken up into different employers of which the private ones have a legal duty to put the shareholder before the interest of the user of public services.

Openness and accountability have been the major casualty of the PFI. The very design of PFI limits user involvement and the funding arrangements are clouded in secrecy. Private companies are not democratically accountable and if they make a mess of the PFI contract the taxpayer still has to pick up the bill.

Social inclusion will not be promoted by cutting the pay and conditions of predominately low paid women workers. The ring fencing of PFI schemes also means that priority projects set up to tackle social inclusion will increasingly have to be sacrificed to meet the growing PFI bill.

On delivery there is no evidence to support the claims that the private sector is more efficient. On the contrary we now have the evidence of failures from the early schemes in England together with our own home grown examples ranging from the Skye bridge to sewage works to hospitals.

Public service workers have no problem with modernisation. In fact they embrace it. A strong public service ethos with a renewed vision for Scotland's public services is absolutely essential if we are to achieve the First Minister's commitment of "no limits on the ambitions we have for Scotland". However, private finance makes no significant contribution to that vision. It manipulates not modernises our public services.

 

References

  1. Ambitions for Scotland: Labours Manifesto 2001

  2. Cabinet Office: Performance Innovation Unit Projects

  3. Scottish Executive: 21st Century Government Unit

  4. Graham Leicester: The Stakeholder Jan/Feb 2002

  5. Dexter Whitfield: Public Services or Corporate Welfare

  6. Anthony Giddens: Where Now for New Labour?

The manipulation of PSCs and PFI is set out in more detail in the following:

UNISON: Public Services Private Finance
UNISON: Challenging the Private Finance Initiative
UNISON: PFI, Dangers, Realities, Alternatives
UNISON Scotland P&I Briefing: PFI in Schools
UNISON Scotland: PPP/PFI in Scotland
UNISON Scotland: PFI Bulletin
UNISON Scotland: Positively Public Draft Manifesto
Centre for Public Services: User/Employee Involvement in PFI


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