UNISON Scotland welcomes the decision of the Scottish
Parliament Finance Committee to undertake an inquiry into PPP/PFI
schemes. After describing the background to PP/PFI in Scotland
this paper sets out UNISON Scotland's position on the issues to
be considered by the committee.
What is PPP/PFI?
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 which 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 provides the building and associated
services.
A typical PFI project will be owned by a company
set up specially to run the scheme. These companies are usually
a consortia including a building firm, a bank and a facilities
management company. Whilst PFI projects can be structured in different
ways, there are usually four key elements: Design, Finance, Build
and Operate.
PFI in Scotland
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 Case against PFI
UNISON Scotland believes there are seven main reasons
for rejecting PFI:
Reason 1. The public service ethos
Public services are not like other commodities.
They exist to support the social, economic and environmental well
being of communities and where a community decides that the market
alone cannot provide a particular activity. The state then assumes
some degree of responsibility for the service: by funding the
service or by regulating for its quality and delivery. In a post
election Mori poll for UNISON 91% of Scots rejected the use of
private companies to run public services. The equivalent figure
for England was 78%.
Reason 2: PPPs are driven by Public Finances
not Public Services
The most common PPP is the PFI, that was conceived
by a government that had lost control of public borrowing. The
government's desire to keep borrowing off the public sector balance
sheet remains the main driver for PPPs. Public authorities
know that PPPs are the only way to get finance, which partly explains
the unspent millions in the public coffers.
Reason 3: PPPs cost more .
PFI schemes cost much more than conventionally funded
projects. The private sector borrows at higher rates than the
public sector since governments can borrow at much lower rates.
They have high set up costs, due to lengthy negotiations involving
expensive city lawyers and consultants employed by both sides.
The first 15 NHS trust hospitals spent £45 million on advisers
an average of 4% of the capital value. The private sector demands
high returns and despite very low risks, profits from PFI are
extremely high, 18% for the Skye Bridge. The City firm Chantry
Vellacott have calculated that PFI schemes cost the public purse
£50m per year for every £1bn of capital value.
There is a growing body of evidence that PFI projects
escalate both in scale and cost. These are not simple cases of
costs going up for a project but reflect the very nature of PFI
itself. The higher costs inevitably lead to an affordability gap
for the procuring authority that is often met by reductions in
services and capacity, subsidies from other parts of public authority
budgets and pressures on labour costs.
Reason 4: PPPs "profit from people"
UNISON has conducted research into the impact of
contracting out in local government on the terms and conditions
of the workforce. UNISON's survey found evidence of a two-tier
workforce something commented on by both the Treasury and Health
committees of the House of commons.
Over 90% of those contacted said pay levels for
new employees were worse that for transferred staff. 1 in 5 of
contracts showed a difference in the standard working week Pensions
are a high value item for employees and a high cost item for contractors
and public authorities.
Guidance from government means that successful contractors
are obliged to offer a comparable pension scheme to transferred
employees. Our research could not find a single comparable scheme
open to new employees. There was either no scheme or else it was
inferior and often the contractor made no contribution whatever.
There is inevitably a gender impact with women increasingly
bearing the brunt of these new privatisations, just as they did
under CCT and market testing. PFI contracts are at least 25 years
long. As the first tier gradually disappears and only those staff
on private sector terms and conditions are left, there will be
a whole class of women workers providing public services who will
have no occupational pensions and who will be working on inferior
terms and conditions.
Reason 5: PPPS go wrong
There have been many claims that the private sector
is more efficient than the public sector but there is no evidence
offered to support this. Now that PFI schemes are coming on stream
there is growing evidence that they are not producing the anticipated
improvements in delivery to time or cost nor are they meeting
the quality standards expected. After all, many of the same companies
that were involved in pre-PFI cost and time overruns are also
building PFI schemes. In Appendix 1 we have set out examples of
problems on PFI projects.
Reason 6: PPPs do not give `value for money `
For many PFI projects, it is only the transferred
risks that make the project value for money. Research for UNISON
by Professor Allyson Pollock, looking at schools and hospitals,
shows that the calculations of risk are arbitrary and unreliable.
At an IPPR seminar in July 2000 a senior representative of a private
sector provider cast doubt on the Public Sector Comparator saying
it could be "massaged either way".
Reason 7: Private companies make unacceptable profits
As well as the huge returns made by private companies
(Reason 3: PPPS cost more) they are refinancing their deals and
yielding huge profits at the expense of the public sector. The
principal risks transferred to the private sector in PFI projects
are those met during the construction phase, risks that disappear
at an early stage of the project. Despite this, the risks are
treated as if they were spread over the whole length of the contract
and it is therefore very profitable for contractors to refinance
projects. At Fazakerley prison the NAO reported that the net result
is that the rate of return for the initial shareholders has tripled
from 12.8% at the start to 39%.
Value for Money
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. We cover some of the main reasons 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 which
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.
Further details on these points with worked examples
are set out in the UNISON publication Public Services: Private
Finance a copy of which has been lodged with the Clerk to
the Committee. A detailed analysis of health PFI schemes and other
PPP/PFI materials are available on our web site.
MSP's may well ask why do public authorities and
their officers approve PFI schemes given the above? The main reason
is that the choice is between PFI and no investment in services
which are urgently needed. However, that is not a reason for using
PFI and approval would not be forthcoming on the grounds that
public sector capital was not available. Therefore authorities
desperately contort the figures as we have shown above in order
to demonstrate that PFI is the best way to deliver a service.
These figures are then used by the UK government to show that
PFI delivers value for money. This bizarre feedback loop was the
basis for the claimed 17% savings in the Treasury sponsored report
from Arthur Anderson.
PPP/PFI would not be necessary if a different approach
was taken to borrowing, which recognised the long term nature
of investment. In the last financial year General Government Net
borrowing was -£11,400m as against PFI investment of £2,971m.
This excess means that all PFI investment could be financed through
the Exchequer. A study by the IPPR and the Commons Treasury Committee
concluded the case for PFI as the main means of getting extra
investment was much weaker as a result of the Chancellor's financial
framework.
As part of this approach UNISON would support the
abolition of Section 94 consents. We do however, have serious
reservations over the implementation of Resource Accounting and
Budgeting. The paper presented to the committee by Jean Shaoul
as part of the RAB inquiry highlights many of our concerns.
It is also important to stress that local authority
members and quango board members are rarely presented with the
financial information in a form which 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".
Transparency and Consultation
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. No water industry scheme
has been published. If these schemes represent genuine value for
money then why the secrecy? The answer is that the officials concerned
have seen published schemes analysed by UNISON and others and
they do not want to face similar scrutiny.
UNISON Scotland believes 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.
The Centre for Public Services has recently published
guidance on user/employee involvement in PFI schemes. Whilst some
mechanisms are based on the English best value regime it does
offer a framework to a user and community approach through representative
community organisations. The Committee may wish to consider this
guidance.
Staffing Issues
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.
In the Glasgow Schools scheme government policy
was ignored and councillors were told that staff had to transfer
to achieve the necessary risk transfer.
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 new starters are
not covered by TUPE. It is therefore imperative that the Scottish
Executive adopts a comprehensive staffing framework for PPP/PFI
schemes. A draft framework has been prepared through the auspices
of the NHSiS Partnership Forum which could form the basis for
such a framework across the public services in Scotland. The key
provisions should include:
- Consultation arrangements before a decision is
made on the method of financing
- The methodology for assessing the value for money
criteria justifying staff transfer
- Model staff transfer agreement including pension
provision and security of employment
- Post transfer negotiating structures including
contract changes by agreement
- New starters employed on equivalent terms
- The arrangements for maintaining team work and
the avoidance of a two tier workforce.
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
UNISON Scotland opposes PPP/PFI because of the threat
to public services and to our members. We believe there are unacceptably
high financial, employment and democratic costs to using this
method of financing Scotland's public services.
In this paper we have attempted to show that the
full consequences of PPP/PFI schemes are rarely considered by
the relevant decision makers and value for money comparisons are
contorted to meet real or perceived approval criteria. Even when
PPP/PFI is used it is possible to mitigate some of the effects
on staff and users through greater transparency and involvement
together with adequate safeguards for staff transfer.
For Further Information Please Contact:
Matt Smith, Scottish Secretary
UNISONScotland
UNISON House
14, West Campbell Street,
Glasgow G2 6RX
Tel 0141-332 0006 Fax 0141 342 2835
e-mail matt.smith@unison.co.uk
Appendix 1
Examples of problems on PFI projects:
· Hairmyres Hospital: East Kilbride's new PFI
hospital has run into a series of problems in only its first few
weeks of operation:
· Patient records lost
· Patients prepared for operations and
then sent home
· Lack of beds
· Outpatient clinics held in corridors
· Unsuitable doors
· Dartford & Gravesham: a brand
new, £177 million, state of the art hospital PFI hospital
that opened June 2000 and immediately had to cancel all routine
surgery because of a catalogue of failures. Doctors couldn't scrub
up because theatre taps only ran at a trickle, sterilised equipment
was not available and porters couldn't transfer patients without
getting permission from their new, private sector managers
· First NHS project in red (Public Accounts Committee
report April 2000):
Dartford & Gravesham (PFI) costing an extra £4m per
year to run, half of which would otherwise have been spent on
other health services in the area.
· Dartford & Gravesham Hospital over estimates savings
The first NHS Trust to sign a PFI contract, Dartford & Gravesham,
was heralded as a flagship PFI project. In April 2000 the Commons
Public Accounts committee reported that the scheme had failed
to make the expected savings:
· instead of 9% savings of £17 million over the PSC,
the project had only realised 3% or £5 million
· The NHS failed to estimate correctly the costs of this
long- term contract and extra funding of over £4 million
a year is now required to enable the Trust to meet its commitments.
"Over half of this extra funding would otherwise have
been spent on other health services in West Kent"
· The Trust failed to detect significant errors in
the public sector comparator and the Trust now expects to achieve
some £12 million less in savings
(Public Accounts Committee Twelfth report : The PFI Contract for
the New Dartford and Gravesham Hospital March 2000)
· Cumberland Infirmary, Carlisle
The Prime Minister opened the first acute PFI hospital, in
Carlisle, in June 2000
· Two ceilings collapsed because of cheap plastic joints
in piping and other plumbing faults - one joint narrowly missed
patients in the maternity unit.
· The sewerage system could not cope with the number of
users and filth flooded an operating theatre.
· Clerical and laundry staff could not work in their offices
because they were too small.
· Expensive bespoke trolleys had to be commissioned because
those supplied did not fit the spaces between beds.
· The transparent roof meant that on sunny days the temperature
inside Cumberland Infirmary reached over 33C - the hospital has
no air conditioning.
· Two windows blew out of their frames, one showering a
consultant and a nurse with glass.
· in August 2000, when hospitals are usually quiet, there
were 'bed jams' at the 444-bed Cumberland, which is currently
at full capacity.
· Backlog of 3,000 unreported X-rays amassed between opening
in April 2000 and September. The Trust said the x-ray department
had been placed under "additional pressure" by the merger
of four x-ray departments under the PFI scheme.
· Fiasco at the Passport Agency 1999, when the brand
new state of the art computer system did not materialise and people
were queuing for passports.
· The company Siemens, failed to develop the new computer
system on time and when they did get it running it processed fewer
passports than the system being replaced. That was a PFI scheme
that was not delivered on time. Siemens, is paying just £2
of the £13 million bill. The public will pay for the rest
with a 75% increase in passport charges.
· National Insurance Recording System
The flagship computerisation by Andersen Consulting was so
delayed that the DSS paid pensions providers more than £35
million compensation for late posting of records.
· Inland Revenue
The amount to be paid to EDS, the US computer company, has
doubled to £2 billion whilst Inland Revenue staff are reported
to be unhappy with the service they are getting.
· Armories Museum in Leeds was another pathfinder
PFI project and it now is facing closure because it failed to
attract the number of visitors needed to keep it solvent.
· Channel Tunnel Rail Link. The largest PFI scheme
ever, that had to be bailed out by the government who guaranteed
a bonds, thereby taking on the risk of the project.
· PFI contract for the Newcastle Estate of the DSS.
(Commons Public Accounts Committee report (May 2000):
· cost £51 million more than remaining in the existing
accommodation
· the expected efficiency savings were overstated
· the deal provides much less space than before, but staff
numbers are expected to rise beyond the capacity of the building
· the cost of the procurement to the DSS rose eleven-fold,
from £0.4m to £4.4million
