Article in the New Economics Foundation website by Andrew Pendleton
As a colleague of mine recently pointed out, if you went into a restaurant and found almost every kind of cuisine on the menu, you’d probably conclude that none of the dishes would be much good. And so it was with Carillion.
Carillion was the rather ashen phoenix that emerged from the flames of a demerger with Tarmac. The gritty, muck and brass bit of the company still trades under the Tarmac name, while Carillion flew off to become the lighter, category-defying winner of multiple public procurement contracts.
Even the name was apparently devised to free it from its sticky roots in aggregates and road surfacing; because meals cooked for you by Tarmac would have made hospital food even less palatable.
And that was the point. The prevailing ideological wind was blowing resolutely in the direction of outsourcing public services and Carillion was the perfect renaissance company to make the most of the opportunity – whatever that opportunity was.
Famously it won major, conventional public infrastructure contracts, such as its part in the HS2 rail consortium – made controversial due to the timing of the letting of the contract. But Carillion also built hospitals under PFI deals, managed the maintenance of around half of the UK’s prisons, prepared tens of thousands of meals for hospital patients and even ran operating theatres. It’s probably easier to list what it didn’t do.
“PFI was essentially about keeping capital investment off government books while ‘supposedly’ transferring borrowing and project risk to the private sector.”
It was not the smorgasbord that was Carillion’s ultimate undoing. It was in fact its failure to deliver two hospitals and a road. Its entry into receivership has led to further delays in the completion of the two hospitals (in Liverpool and Sandwell) and brought all of its other contracts crashing down in the process.
I doubt anyone is arguing that roads and hospitals should actually be built by government rather than private companies. But both the Royal Liverpool and Midland Metropolitan Hospitals are being constructed under PFI schemes and that does throw up a big issue. Concocted during the salad days of privatisation, PFI was essentially about keeping capital investment off government books while ‘supposedly’ transferring borrowing and project risk to the private sector.
Problem 1: PFI has created a dysfunctional market
The trouble is that most public infrastructure is too important to fail; in the case of hospitals, lives depend on the infrastructure. Neither NHS trusts nor central government would allow a company to default on loan repayments that enable a hospital full of sick people to continue operating. So, while the financial risk technically sits in the private sector with PFI, if a company like Carillion is unable to meet the necessary repayments, these debts are effectively transferred to the taxpayer.
At the heart of this lies an issue with accountability. After almost 7 years of austerity in which local authorities and other public bodies have been forced to shed staff and knowledge – the chances of holding large, more-or-less monopoly-holding companies to account for their conduct are slim. In fact key institutions like the Audit Commission have been dispensed with altogether, only compounding this issue further.
Aside from this, it’s hard to believe that many PFI deals are good value, simply because the government can always borrow at lower rates than private firms. As economist Simon Wren-Lewis points out, PFI is the wrong way round as the private sector borrows at a presumably higher cost, pockets any profits and then transfers the risk to the public sector.
Figures from a recent National Audit Office (NAO) report highlight this point. Debt and equity investors of PFIs are estimated to receive a return of between 2–5% above government borrowing. These returns can have a considerable impact on the overall cost of a project. In fact, the NAO analysis shows that private finance procurement resulted in schools and hospitals costing between 40–70% more, than if the costs had been covered via public finance and procurement. With PFI, we are essentially getting 2 schools or hospitals for the price of 3!
A second part of the glorious logic of PFIs is that private firms are inherently more efficient. But is that true? Even the NAO has been unable to tell whether many of these deals are good or not, because the Treasury was unable to come up with a credible account of benefits in terms of savings. But whether any of the PFI logic stands up or not, the NAO report concludes that public bodies are now locked into £199 billion of future charges due to the existing 700 or so operational deals.
“While the financial risk technically sits in the private sector with PFI… if a company like Carillion is unable to meet the necessary repayments, these debts are effectively transferred to the taxpayer.”
Add to that the cost of bloated CEO salaries and bonuses, the transfer of value to shareholders, the probable elaborate ‘tax planning’ by the outsourcing firms, the financialisation and selling-on of the assets to wring further value out of them and you’re left with a level of risk and precarity that school children and hospital patients really shouldn’t be exposed to.
It’s also easy to see why firms like Carillion want to be the bankers as well as the builders. If you lend and collect repayments, then you can make even more of the opportunities afforded by financial markets – you can play with taxpayers’ money. But there is nothing inexorable about PFI. It was a political choice based on an ideological predilection for private-sector-everything; other options are available.
The mutant children of PFI are already stalking the public sector landscape. Because local authorities aren’t able to borrow much themselves, they are now setting up their own third-party investment vehicles to access the roulette wheel of international financial markets themselves. Here, lie more disasters waiting to happen.
Hospitals and schools, public housing, railway lines and roads will almost certainly be built by private firms. But if borrowing can be done for less by the state, and if the risk will ultimately fall on the shoulders of public bodies anyway, PFI should be consigned to history. We are already saddled with repayments to private firms which amounted to £10.3 billion in 2016/17. That’s enough.