The demise of Carillion has exposed the way that UK public services – from the NHS to energy – are contracted out to businesses. In a new piece he has co-authored for The Conversation, Dr Ekililu Salufi says it’s time for a re-think on Private Finance Initiative (PFI) schemes.
Carillion’s collapse has brought with it wider scrutiny of the way that UK public services are contracted out to businesses – particularly through the use of Private Finance Initiative (PFI) schemes. The UK’s second largest construction business had a network of these contracts, worth billions of pounds, providing essential public services across government departments. The NHS, defence, education, energy, and prisons have all been left exposed by its collapse.
While the winter crisis tightens its grip on the NHS, two urgently needed hospitals – the Midland Metropolitan and the Royal Liverpool – that were supposed to be constructed by Carillion under PFI
But the company’s collapse is the tip of the iceberg when it comes to the failure of PFI to give the public good value for money.
These financing schemes were originally devised as a means by which governments (both Conservative and Labour) could construct prisons, schools and hospitals with private sector finance – rather than directly burdening the government with the debt of the infrastructure costs. In some ways, the PFI process was successful: many regions of the country benefited from new hospitals and other public infrastructure.
But in return for the upfront capital costs being financed by private investors, the hospital trusts (or other public bodies) were then often burdened with contractually onerous financial payments for the following 25-30 years. The payments to these investors meet their capital development, service and financing costs; and provide a high return, in some cases of up to 60% to their shareholders.
All governments since 1992 contributed to the expansion of PFI, culminating in its rebrand as PF2 under David Cameron’s leadership in 2012. There are currently more than 700 PFI and PF2 schemes, with capital values of about £60 billion. Altogether they are set to cost the taxpayer about £200 billion to service over the next 25 years.
The costs outweigh the benefits
The evidence shows that PFI is always more costly relative to its publicly funded alternative – a recent government report found that some are as much as 40% more expensive. These extra costs, meted out to the private sector, go on to line the pockets of shareholders – many of which hold their earnings in offshore companies, therefore paying little to no tax on these earnings in the UK.
Meanwhile, there is little to no evidence that PFI delivers operational efficiencies. Nor that it is the only route through which public assets can be maintained to a high and acceptable standard throughout the life of the asset. At the time of the rebrand of the PFI as PF2, the Treasury found and reviewed evidence that budgetary and accounting incentives also cause public bodies to choose the route of PFI, even if it didn’t offer superior benefits over a publicly funded option. Yet, the Treasury refused to close those loopholes.
The primary justification given for why PFI/PF2 is pursued is that it allows risk to be transferred from the public sector to the private sector and hence demonstrates value for money by being a less costly alternative to public financing. So central is the assumed transfer of risk to PFI schemes that virtually no PFI scheme is seen as less costly than its public counterpart, until the assumed risks involved are costed up and added to the public counterpart.
The notional transfer of risk is, however, undermined by PFI failures such as that of London Underground’s Metronet in 2007, and now Carillion. Public agencies might seek to transfer risk through PFI, but they ultimately remain responsible for the delivery of public services. In failed schemes, it is the taxpayer that ends up picking up the tab for the private sector’s mistakes. All the while, more is paid for the luxury.
It demands a rethink of the way that the government outsources essential services, especially through PFI. The central arguments in the outsourcing of public services are those of gaining expertise and efficiency savings. These could still be paid for and cultivated within the public sector – especially given how much money is currently paid to the private sector through the PFI schemes that do not fail. Let alone the cost of salvaging those that do.
This post was originally published on The Conversation, 24 January 2018 and was co-written by Iqbal Khadaroo, Professor of Accounting, University of Sussex.
Dr Ekililu Salufi is a Lecturer in Accounting at Henley Business School, University of Reading.