Private Finance Initiative Uproar After Carillion
Private Finance Initiative (PFI) deals are being condemned for leading to massive cost overruns and contracts, after the National Audit Office (NAO) reports that they will cost taxpayers around £199bn over the next 30 years. In a report that was prepared before the collapse of Carillion, Whitehall’s spending watchdog has disclosed that the government has invested £350m in public money in one of the failed firm’s PFI projects. The report has said that there are currently 716 private finance deals operating in the UK with a total capital value of around £60bn.
The government has defended the PFI and PF2 systems, saying that “Taxpayer money is protected through PFI and PF2 as the risks of construction and long-term maintenance of a project are transferred to the public sector.” However, the NOA report shows that using private companies to build and manage public sector projects means that taxpayers are, in fact, actually paying as much as 70% more than they would if these projects were funded by the government.
Rehana Azam, GMB union’s national secretary said the NAO report reveals that PFI is a “catastrophic waste of the taxpayers’ money.” Azam said: “Nothing can hide the chronic failure that it has proven to be over decades. Carillion is just the latest example of how bad things go wrong when public services are left in the hands of profit-hungry companies. This report should mean that the game is up for PFI.”
PFIs are not only more expensive than the traditional method of using public borrowing, they also permit the companies to make outrageous profits from public funds including, the NHS Trust. The government has hit back at Labour for attacking the “costly racket” of hiring private companies to run public services, but the practice has been utilised by both parties. If Theresa May really wants to provide “good quality public services, delivered at best value to the taxpayer,” she should use the Carillion crisis as an opportunity to cope with the persistent problems with PFIs.
PFI profits indebting NHS Trust
According to a report by the Centre for Health and Public Interest (CHPI), the private companies that build NHS hospitals made £831million in pre-tax profit in the six years from 2010 to 2016. The report, titled PFI, Profiting From Infirmaries, says this profit was in addition the profits that were made by the construction companies who built the hospitals and the firms that maintain the buildings and provide other services.
Analysing the impact of the PFI system on the overall NHS underfunding, CHPI concluded that the cumulative costs to all NHS hospitals over the six years it had studied was £3.4billion. This would have been reduced by a quarter if the £831million in pre-tax profit these companies made went to patient care rather than giving these companies average profits of 9.4% a year. If the NHS didn’t have to pay these escalating pre-tax profits to PFI companies over the next five years, the report estimates that £973million more would be available for patient care. PFIs are a key reason why the NHS reported a net deficit of £791million for the 2016-2017 financial year.
The CHPI report recommended the government use public sector loans to buy out PFI contracts and fund new capital investment in hospitals. They conclude that this will be cheaper in the long-term and it wouldn’t mean that money intended for patient care would end up as payments to directors and shareholders. During the NHS’s “most austere decade in its history,” the report advised the government re-negotiate these contracts so the NHS saves money, tax the companies higher to claw back some of the excessive profits and set a cap on the amount of profit companies can make.
PFIs and PF2
The concept of using PFIs to build schools, hospitals, roads and railways uses private sector investment to deliver public sector infrastructure and services. The UK began using PFI schemes in 1992, under the Conservative government of John Major. Labour initially attacked the practice as “a form of back door privatisation,” but then PFIs became even more widely used under the new Labour government in 1997.
Both parties have argued that the high cost of PFI deals should be reformed, especially after cases when a PFI has had to be propped up with taxpayers’ money. The scheme has manged to continue for so long because it allows for infrastructure investment that don’t appear as debt on the government’s books. The costs of borrowing through the intermediary is, however an expensive burden carried by future taxpayers over a period of around thirty years.
PF2 was the Treasury’s “new approach to public private partnerships” in 2012 which intended to reform PFI, by making companies invest more of their funds as equity which reduces the risk to banks. This reform was a response to a critical 2011 House of Commons Treasury Committee report that clarified that the government’s incentive for using PFI was not related to getting value for money. It was, and still is, used by governments to improve infrastructure without using their allotted capital budgets.
The PF2 reforms made few improvements to the significant systemic issues with PFIs, except shield banks from risk. It didn’t deter companies from making outrageous profits, and it increased public risk. One major drawback of PF2 is that the government’s share of profits drops from 50% to 33% if the deals are refinanced, which ends up costing taxpayers millions of Pounds.
Escaping the legal offshore loan sharks
The NAO report shows that, in some case, PFIs are 40%--and in one case 70%--more expensive than public financing options. The nightmare with PFI contracts is that they are both too expensive to continue and there are massive costs for getting out of the deals. The chair of the public accounts committee, Meg Hillier, addressed this dilemma by saying, “Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change.”
Labour MP Stella Creasy has pointed out that these companies are also getting a massive corporate tax break since they had been paying 30% tax rates when most of the contracts began, but the corporate rate has been reduced to 17%. She estimates that this means some firms have saved around £190million which she thinks is owed to the public sector. She suggests PFIs, which she has branded “legal loan sharks of the public sector” pay a windfall tax. The tax would help recover the £10.3billion in annual charges the UK pays for these deals, of which half is interest and charges.
As it stands, some of these PFI contracts are held by offshore companies who pay little or no UK corporate taxes and their investors are enjoying average annual returns around 28%. Rather than focus on clawing back some of the bonuses paid to Carillion’s executives, such as the £1.5million paid to former CEO Richard Howson, the prime minister should follow the suggestion of a windfall tax. This money should then be used to fund buying back the public infrastructure and operating these services in-house, putting an end to the days when UK’s public assets can be “a cash cow” for contractors like Carillion.