Scottish Trade Union Research Network
National Seminar – University of Abertay, Dundee, 12 February
Private Finance in the Public Sector
– Modernisation or Manipulation?
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.
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
"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
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:
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
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
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.
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
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.
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.
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.
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
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
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.
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.
Ambitions for Scotland: Labours Manifesto 2001
Cabinet Office: Performance Innovation Unit Projects
Scottish Executive: 21st Century Government Unit
Graham Leicester: The Stakeholder Jan/Feb 2002
Dexter Whitfield: Public Services or Corporate Welfare
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