Private Finance Initiatives for dummies: a short how-to guide!
Article originally published on ProtectOurFuture.scot
Once upon a time, the public sector was in charge of designing and building public infrastructure, assuming all cost before and after the completion of the project –including maintenance of the infrastructure and delivery of services. For decades, the public sector was doing a pretty good job – in a sense that citizens knew that health, education and social services were owned and managed by the state, funded by taxpayers’ money and public debt was at manageable levels (you can have a look to last century’s public spending by clicking here). However, one cloudy day in 1994, the Conservative Government announced that “PFI should be considered for any public sector project” (p.2 from House of Commons report).
I’m not going to get into much detail regarding the advantages and the rationale behind PFI. If you really want to find out how awesome Private Finance Initiative (PFI) is, just Google ‘why use PFI’ – believe me, you will find all information you need on why market mechanisms just rock! However, for the rest of you, I will give a brief summary on why the public sector rolls back, giving more space for the private sector to operate (if you think that the correct answer is ‘neo-liberalism’, well done – due to restricted funds no prize included, sorry!).
Essentially, the public sector looks like this:
Whereas, the private sector is similar to this:
In June 2008, the Scrutiny Unit in the House of Commons published a report on the rationale behind PFI. According to this, ‘PFI supporters’ (don’t ask me who exactly, they didn’t cite!) argue that privately funded projects are generally more efficient than projects funded and managed by the public sector. This is because “they enable private sector innovation” (p.5) (You didn’t even look at the pictures above, did you?). However, the same paper admits that the “evidence on whether PFI projects have improved innovation has been mixed” (p.7).
Okay, let’s move on to another positive point. The same report also tells us that PFI is a really good thing because the government can better manage risks by transferring them to the private sector. These risks may include: any extra costs that may arise due to unpredictable circumstances; delay in completion of a project; operating and maintenance costs (to name a few). This practically means that our dear public sector can sit back, relax and enjoy the private ride while the innovative private sector cleans up the mess. Ha! Losers! I’m sure that there’s some solid evidence behind these claims, but it must be really precious because it’s very well hidden.
As a matter of fact, I tried to find citations/references on this official paper and the one that kept reoccurring was a publication by the HM Treasury (March 2006) with the title “PFI: strengthening long-term partnerships”. I said: This is it! In a 128-page document there must be plenty of scientific evidence to support market reforms! Actually, I found 16 citations, among which there were: 1 survey, publications by National Audit Office’s and private sector organisations.
But you don’t need to worry, I’ve done my homework! Contracting with the private sector is assumed to bring the positive effects from either competition itself or ‘potential competition’ into the healthcare market, establishing an efficient market price1. The explanation of these concepts can get a bit messy, so, let’s say that competition among bidders (i.e. private companies competing for a project) in the pre-contractual (“procuring”) phrase 2 and the ‘threat’ of new competition (i.e. new companies that may enter the market) in the post-contractual phase3 should ensure a good deal for the public sector – high quality and low price. 4 Another argument on why PFI is cool consists of the fact that during the negotiations and design of a contract, the state is ‘forced’ to explicitly identify desirable outcomes, available resources and top priorities, making it more accountable5. Let’s put it this way: without signing contracts with private companies, the public sector may find it a bit too difficult and complicated to rationalise its Terms and Conditions.
Hospital before and after PFI
Well, this is a part of the theory supporting why PFI should work; but there are many other reasons why it won’t. It’s impossible to provide a thorough analysis of all of these in one piece. For this article, we will just briefly and superficially talk about a very popular PFI project (actually in Scotland it’s been changed a little bit and is now called NPD, it’s a long story and I don’t want you to fall asleep, so we’ll get to this another time): the new Royal Edinburgh psychiatric hospital.
Are you stuck in a low-paid job, with no prospect for promotion or pay rise? Are you struggling with paying your council tax, credit card bill or mortgage? Are you looking for new, exciting career opportunities? Are you sick and tired with your unpaid internship and your highly prestigious degree? You can become a plumber, electrician or carpet fitter with Galliford Try!
Galliford Try is the private company that is responsible for the construction of the new Royal Edinburgh psychiatric hospital – in one word, the contractors who will execute what once would have be done by the NHS. A joint investigation by The Guardian and The Ferret reveals some pretty interesting stuff, among which there were leaked documents, showing pay rates and installation charges paid from NHS Lothian to the private contractors. According to the NHS, these fees (see below and click on link for more info), were a) competitive and b) NOT included in the initial contract. If that was the line of defense, let me tell you that it doesn’t look good. I know that my mum made me really smart, but, please try to follow this calculation:
Well, the people that wrote this document didn’t think that installation charges are something that should be included in a construction contract. So, the company wants to charge the NHS £28.00/hour for a plumber for a Monday to Friday, £42/hour for a Saturday and £56.00/hour for a Sunday. For an electrician, the pay slightly increases with £36.00/hour for a Monday to Friday, £54.00/hour for a Saturday and £72.00/hour for a Sunday. The money paid by the NHS for a carpet fitter/flooring contractor is a real bargain with only £20.75/hour for a Monday to Friday, £31.13/hour for a Saturday and £41.50/hour for a Sunday. Now, for the rest of us… c’est la vie! However, I wonder how much of the money spent will actually end up in these workers’ pockets…
My favourite is the relocation of Electrical Fire Signage (meaning the green EXIT sign that you see even in a mouse hole in the UK) – £395.58 and installation of Electrical Fire Signage – £645.58. Don’t get me wrong, I’m sure that this is a highly demanding task and that the EXIT sign must be a hell of an EXIT sign, but, it wasn’t possible to combine relocation with installation in one –let’s say- reduced price? To end on a high note, we all agree that the Mechanical & Electrical Engineer director is an extremely important role that needs to be appropriately rewarded. However, I think that an hourly rate of £135.00 and a day rate of £1,080.00 are probably a bit too much. Even for the efficient private sector.
And because there are Trumps and Le Pens in this world, next time you or anyone else next to you, blame immigrants and refugees for stealing your well-paid jobs, think of these figures (or simply search ‘why racism is dumb’).
- Appleby, J. 1998. Economic Perspectives on markets and health care. In: Ranade, W. eds. 1998. Markets and health care. London: Longman, p. 23-24, 34-35, 49
- Domberger, S. and Jensen, P. 1997. Contracting out by the public sector: theory, evidence, prospects. Oxford review of economic policy, 13 (4), pp. 67–78.
- Baumol, W. J. and Others. 1982. Contestable markets: an uprising in the theory of industry structure. American economic review, 72 (1), pp. 1–15.
- Hellowell, M. 2012. The role of public-private partnerships in health systems is getting stronger.Commonwealth Health Partnerships.pp.72
- Allen, P. 1995. Contracts in the National Health Service internal market. The Modern Law Review, 58 (3); Domberger, S. and Jensen, P, loc.cit; Sekhri, N., Feachem, R. and Ni, A. 2011. Public-private integrated partnerships demonstrate the potential to improve health care access, quality, and efficiency. Health Affairs, 30 (8), pp. 1499.