Public Private Partnerships Staffing Protocol

Protocol Index | Appendix 1

Appendix 2

Key arguments against Public Private Partnerships

Introduction

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) introduced by the Tories in 1992 is the most frequently used scheme.

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 provides the building and associated services. A typical PFI project will be owned by a company set up specially to run the scheme called a Special Purpose Vehicle (SPV). The SPV is awarded a long contract (typically 25 to 30 years) to design, build, finance and operate the public service.

PFI in Scotland

There are 59 completed PFI deals in Scotland with a capital value of just under £2bn. A further £637m are planned. The revenue cost depends on the range of services included in each scheme – but are typically five times the capital value. Water, local government and health are the major users of PFI in Scotland.

In the last two years there has been a significant reduction in the number of PFI schemes in Scotland. However, a massive schools PFI programme has been launched and this is likely to be followed by new hospitals, roads and prisons. Other projects are being developed as broader PPP schemes including water, transport and housing.

PFI Myths

MYTH 1: PFI/PPPs increase investment

All investment, public and private is usually borrowed from the same private money markets, but the public sector can borrow at 2-4% lower rates than the private sector. The private sector does not access new forms or higher levels of funding. Like buying a house with a mortgage, the repayments still come from the same public sector sources. Nor is PFI investment additional - local councils and hospitals have no choice except PFI.

MYTH 2: We could not build as many schools and hospitals without PFI

There is enough money in the Chancellor's budget surplus to pay for the entire PFI programme. If the public sector were allowed to borrow themselves to pay for investment, it would cost far less than PFI and so provide more investments. It is a political, ideological choice to use PFI.

MYTH 3: Only PFI can build hospitals and schools quickly

PFI takes far longer than conventional procurement - at least one year to produce a business case and select a preferred bidder and another year negotiating with the preferred bidder. Conventional procurement only needs a contract to build or refurbish. But PFI schemes require vast and complex contracts that cover all the services for at least 25 years. Because of the complexity, PFI contracts need armies of advisers too, as much as 8% of project costs are spent on advisers.

MYTH 4: PFI/PPP is not privatisation

Under PFI the private consortium owns the buildings; provides the services and employs the staff for at least 25 years. That is privatisation. Some schemes allow the public sector to take back ownership after the contract ends - but only if they pay for it.

MYTH 5: Risk is transferred to the private sector

PFI supporters claim that risk is transferred to the private sector but if a public service fails - the ultimate risk - it is bailed out by the public sector. Expert analysis of PFI schemes shows that the risk transferred is grossly exaggerated either using risks that never happen or putting too high a value on them.

MYTH 6: Private sector is only paid if they deliver

In theory, poorly performing contractors can be fined for poor delivery and ultimately sacked. In practice, public authorities are reluctant to penalise companies who with whom they have long term contracts of 25 years or more.

Even if the contractor is sacked, the public authority is still obliged to pay the banks for the financing of the PFI contract.

Alternatives to PPP/PFI

Some of the alternatives require amendments to Treasury rules including new definitions of public expenditure in the line with European models such as the GGFD. Off balance sheet incentives inherent in the current block grant system and Departmental Expenditure Limits (DEL) also need reform. In the UK some £47bn of public expenditure is now off balance sheet. Enron economics is no way to finance our public services.

In Scotland progress could be made by providing capital grants on a genuine level playing field basis, giving public authorities a genuine choice between funding sources. There needs to be a substantial increase in capital funds and the freedom for all public authorities to borrow to fund investment. Local authorities are promised such powers in the Local Government in Scotland Bill.

Other claimed alternatives to PFI, such as not for profit Trusts are still PFI schemes with a different form of SPV. In the main this is simply window dressing. Conventional borrowing remains the most cost effective and flexible method of financing public services. It retains accountability and enables public authorities to engage in genuine consultation with service users without the smokescreen of commercial confidentiality.

The much needed rebuilding of Scotland's public services, and the creation of valuable construction jobs, can be achieved without dodgy Tory finance schemes.

Appendix 3

THE PFI PROCESS

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