They told you so: 2 experts who warned us about PFIs

For some observers, the National Audit Office’s gloomy report showing the true cost of Private Finance Initiatives comes as no surprise.

Thursday’s report from the National Audit Office was a cold dose of reality for the two main parliamentary parties.

Britain will be paying off the cost of Private Finance Initiatives — the use of private money to help fund public sector projects — for decades to come.

And the bill already comes to nearly £200 billion.

Since the 1990s, both Labour and the Conservatives have launched such schemes, insisting that it was the best way of limiting the cost to the public purse.

So the new NAO report, published just days after the collapse of Carillion, could hardly have been more timely.

 

Visualisation by Carmen Aguilar Garcia and Victoria Oliveres Torrescassana

But for some observers, none of this comes as any surprise.

“Why has the NAO taken so long to state the obvious?” tax specialist Professor Richard Murphy Professor Murphy asked in a blogpost Thursday.

Professor Murphy, a qualified chartered accountant who lectures at the University of London, has been among those warning of the dangers of the PFI model for at least 15 years.

In a 2003 position paper written with Colin Hines and Alan Simpson (then the Labour MP for Nottingham South), he argued for a People’s Pension Fund as an alternative to the PFI option.

Even then, they were warning:

Attempts to leverage private sector cash to pay for schools and hospitals have repeatedly been exposed as bad deals for the public.

At the same time there is a pensions crisis with people in Britain seeing their life savings destroyed by the same volatile global markets that wreak havoc in poor countries.

Today, the shockwaves from Carillion’s collapse are hitting jobs and businesses across Britain — and beyond.

Former employees, meanwhile, are waiting to hear what that the company’s pensions deficit will mean for their future.

‘An expensive con-trick’

In a post at his website on Wednesday, Professor Murphy addressed one argument for PFI: that it passed on the risk of contracts going wrong from the government to the contract.

The first problem with this, he argued, was that in many cases, this did not actually happen: the government still absorbed cost over-runs.

“In that case PFI can best be called an expensive con-trick by contractors on the government,” he noted.

The second flaw is that in the rare cases when the risk is actually transferred from the government to the contractor, as has happened in the case of Carillion, limited liability lets the contractor fail and pass the risk on to stakeholders throughout society. In that case PFI can best be called an expensive con-trick by contractors on society.

In place of PFI, Professor Murphy argues for a National Investment Bank funded by a “People’s QE” (Quantitative Easing) programme — public investment, in short.

‘Liquidating’ NHS care

It is a similar story for Allyson Pollock, professor of Public Health Research and Policy at Newcastle University’s Institute of Health and Society.

Professor Pollock has been campaigning for more than 20 years against what she says in the privatisation of the NHS — and identifies PFIs as part of that process.

Her website lists dozens of academic papers, magazine and newspaper articles on the effects of the PFI on the National Health Service, dating back more than 20 years.

As early as the late ‘90s, she was warning that PFI deals for the NHS would harm patient care and exacerbate the service’s financial problems.

In a 2013 paper, PFI and the National Health Service in England, cowritten with David Price of the University of London, she summed up the harmful effects of PFIs on the NHS.

Among the issues they raised were:

  • tax avoidance measures by many offshore-registered PFI companies;
  • a correlation between the presence of large PFI building projects and hospital deficits and reductions in services and staff;
  • the higher borrowing costs of private finance compared to public-sector alternatives;

They added:

PFI rates of profit have been shown to be excessive, that is, higher than conventional profitability for equivalent projects…

The effect of high interest rates and excess returns can be seen in levels of debt repayment.

And that would hit taxpayers, they argued.

Cuckoos in the nest

NHS plc: the cover of Prof. Pollock's book

Professor Pollock’s book denounces what she says is the privatisation of the NHS

They cited one study showing that the annual debt repayment to PFI consortiums was:

…between 1.49 and 2.04 times higher than the amount that would have been charged to the UK government if it had borrowed directly for the construction.

Thursday’s National Audit Office report noted there were more than 700 PFI deals, with a capital value of around £60 billion.

Annual charges for these deals amounted to £10.3 billion in 2016-17. It added:

Even if no new deals are entered into, future charges which continue until the 2040s amount to £199 billion.

“There is still a lack of data available on the benefits of private finance procurement,” it noted a little later.

Pollock also set out her case in a 2004 book, NHS plc: The Privatisation of our Health Care.

In his four-star review for the British Medical Journal (four out of four), geriatrician and novelist Colin Douglas summed up Pollock’s attack on the PFIs.

…[A]ll over the country PFIs—greedy, noisy, alien cuckoos in the NHS nest—gobble up its finances and will do so for the next 30 years. Yet this we have come to call progress.

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