Public-Private Partnerships: What went wrong?

by Marc Geddes

Last week we saw South London Healthcare NHS Trust plunged into bankruptcy (or almost at least). The reason for the crisis has been squarely blamed on unaffordable, costly private finance initiatives, or PFI schemes. It essentially involves the introduction of private capital into public sector projects – the private company pays for the project now and takes with it the associated risks, and the government pays the company back over a number of years for being able to use the end result (usually a building). This type of ‘public-private partnership’ (PPP) has become a pervasive tool for governments since they were introduced by the Major government in the mid-1990s. By 2009, £75 billion of private finance had been channelled into public sector infrastructure (especially hospitals and schools). [1] At that time, the Conservatives called the PFI model ‘discredited’ and promised an overhaul once in government. So what’s the big argument about? Here are some of the basics:

Advantages:

  • Encourages the displacement of risk to an expert-based company in the private sector, who will have strong incentives to ensure efficiencies in construction.
  • Conventional finance may be difficult to come by, as has been the case since 2008 and the global financial crisis.
  • It could encourage the development of a new private sector industry that would otherwise remain squarely in the public sector.
  • Strong incentives to keep to time and price – the contracts developed at the start of the project are fixed, so if the contractor takes his time, he won’t get paid.

Disadvantages

  • Contracting services out may not deliver value for money because the government is not in control of the costs and efficiencies of public sector projects.
  • The contracts are fixed and usually last 20-25 years, so the government and future governments will be paying in years to come, regardless if the building is any use to the public sector.
  • Displacing risk only work until the private sector baulks out of the industry – ultimately, the public will demand a hospital and a school, so risk will always remain with the government to ensure the project succeeds.

The Treasury Select Committee concluded in 2011 that most PFIs have been poor value for money and present a significant cost to taxpayers – or as Andrew Tyrle MP put it to the Today Programme, taxpayers are ‘getting ripped off’. [2] Their conclusions are matched by those in the academic literature, as well as reports by the media. [3] Chancellor George Osborne announced later that year to fundamentally reassess the use of PFI contracts in order to reduce costs and save the government money. The very opposite to the original aim of PPPs had occurred since 1992, with profit margins up to 70 per cent for private contractors. [4] So Osborne’s announcement seems good news for everyone. It gives me no joy to accept that the Labour government had fundamentally mismanaged PFIs and should not have copied it from the Conservatives in the 2000s the way that they did.

This is a great shame, because PFIs could have been a tool for governments if they had acted with much more caution and transparency. This is because it could have offered more responsive policy-making at the local level, by involving a far greater number of stakeholders to ensure the effective delivery of resources to communities and local people. It could have acted as a method of decentralisation. [5] In this sense, Labour was right to consider PPPs – and yet, the way in which private contracts were made suggests that they did not work.

The big question is, has the Coalition government learnt from Labour’s mistake, or is it just going to make the same ones? The evidence so far indicates that Osborne’s announcement has so far been rhetoric without corresponding action. The Conservative-led government, within one year of being in office, signed 61 PFI projects, worth £6.9 billion. At the peak of PFI schemes under the Labour government, Tony Blair had signed off 67 projects worth £4.6 billion that neared their completion in 2000. This does not sound like the Conservative government has done anything at all to save taxpayer money – indeed, the cost of PFIs under the Coalition could be much, much worse. Although Labour have made errors, the Conservatives have made next to no improvements to PFIs – signing off multiple projects and seemingly happy to see a hospital go bankrupt. In one example, Andrew Lansley signed a deal involving initial capital expenditure of £244 million, a contract which is then expected to run for 34 years, in which the private contractor will make £421 million at current rates. In other words, the taxpayer is funding a project that costs £244 million, but paying £175 million more than it needs to. [6] Interestingly, the government has recently asked former head of PFI policy at the Treasury, Geoffrey Spence, to head up Infrastructure UK, a Treasury body that will play a leading role in designing the public investment elements of the government’s growth strategy. Has the Coalition learnt anything? Seemingly not.

PPPs, as mentioned before, do have the potential to work. Obviously both Labour and the Conservatives have got things horribly wrong. The reason for this is that they have both focused on economic partnerships, in which the private sector provides the finance for public use. A different type of public-private partnership does exist – in countries like Sweden and Germany – where they do have the possibility to work. They are, however, not economic partnerships, but social ones. The focus is on collaborating and on sharing responsibility, with clearer visions of the purpose of the public service (lacking in this country). The motive is joint problem-solving, with a trend towards competitive subsidy arrangements, the dissolution of monopolies and more service and quality measurement standards. [7] The UK can learn a lot from these ideas, especially in an age of fiscal constraints. What is required is a shift from economic partnerships to organisational ones (unlikely given Geoffrey Spence’s appointment). As Hodge and Greve conclude: ‘the public sector will have to stop thinking about itself as ‘purchaser’ and the private sector will not only be ‘provider’, but instead be a ‘partner’ and share organizational attributes, responsibilities and citizen expectations’. [8]

Let’s all hate PFI. But let’s not do away with PPPs just yet.

mg

[1] M. Hellowell (2011) ‘Money for Nothing: Private finance initiatives in the UK’, Political Insight, pp.8-11.

[2] HC 1146 (2011) Private Finance Initiative, Seventeenth Report of Session 2010-12, London: HMSO.

[3] G. Hodge and C. Greve (2005) ‘Public-Private Partnerships: A policy for all seasons?’ in G. Hodge and C. Greve (eds.) The Challenge of Public-Private Partnerships, Cheltenham: Edward Elgar, pp.332-49.

[4] Hellowell, ‘Money for Nothing’, p.8.

[5] S. Osborne (2000) (ed.) Public-Private Partnerships: Theory and practice in international perspective, pp.1-2.

[6] Hellowell, ‘Money for Nothing’, p.9.

[7] Hodge and Greve, ‘Public-Private Partnerships’, p.340.

[8] Ibid., p.345.

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