Public Private Partnerships – surely not again!

I thought I wouldn’t need to write about PPP ever again. However, as the Chancellor is considering private finance for new infrastructure projects, a new generation of politicians and officials must be reminded of this bonkers idea.

 

A Public-Private Partnership (PPP) is a funding model for public infrastructure projects. It is an umbrella term for schemes like the Private Finance Initiative in the UK. It encompasses schemes such as the Hub programme and the Non-Profit Distributing (NPD) model in Scotland. The Tories invented PPP, although the Blair/Brown governments massively expanded it. The SNP came to power in 2007 and committed to ending these schemes but simply rebranded them through the work of the Scottish Futures Trust. Even the Tories abandoned them for new projects in 2018.

The Chancellor is considering such models because of the fiscal pressures the UK is currently under. They are proposing to tweak the model with the introduction of ‘value-for-public-money’ clauses. This test looks similar to those in the old model, which was easily circumvented. PPPs claim to offer a way to avoid tax rises (in the immediate) and break fiscal rules. However, whilst PPPs provide a way to get around short-term budgetary rules, they simply push expenditure forward and pressure revenue budgets. New Labour era ministers promote the model despite admitting it ‘is not without its shortcomings’. The industry is already salivating over the prospects of easy profits while claiming they have learned the lessons of PFI.

 

The evidence against using PPP is extensive. This briefing sets out the major problems and risks the UK has encountered through its extensive experiment with PPPs, including how they have:

·       Cost the government more than if it had funded the public infrastructure by borrowing money itself

·       Led to large windfall gains for the private companies involved at public expense

·       Enabled tax avoidance through offshore ownership

·       Led to declining service standards and staffing levels

·       Hollowed out state capacity to design, build, finance and operate infrastructure

·       Eroded democratic accountability

 

This is not just about historical costs; the price continues to be paid. PPP projects in Scotland typically run for 25-30 years, and you can view the cost for each legacy project here. In the UK, over 700 projects have been built using PFI since the early 1990s, worth around £60 billion. They distributed £300 million in dividends to investors from £1 billion in profits between 2005 and 2022. As NIESR points out, “We are spending far more in PFI repayments than the value of the assets and are locked into these contracts for decades to come. Most households wouldn’t take out loans on terms like this, so why did the public sector?”

A study of parliamentary inquiries into PPP scandals examined a consistent pattern of wrongdoing. Over the past decade and a half, billions of taxpayers’ funds have been unaccounted for. This appears to be mainly because private interests have been prioritised over public needs. Other findings showed that companies regularly reduced the quality of a service to maximise profits. Companies sometimes breach the terms of their public-private contracts because it’s in their economic interest. This even has a name – economists call it ‘efficiency breach’. As many of these contracts come to the end of their life, buildings are being handed back with huge maintenance bills.                               

Successive opinion polls show that the public wants essential public services to be nationalised, not handed over to private companies to make rip-off profits. The hard lessons of the past should not have to be relearned. We already know that taxpayers and consumers will pay the price.

Still learning the lessons of PPP

Nearly thirty years after John Major’s government introduced the Private Finance Initiative (PFI), it is astonishing that we are still writing about and using this failed model of delivering public services.

Today, we are reminded by Audit Scotland, yet again, of the costs of using this model. It has been modified and rebranded many times over the years. In Scotland, the SNP government calls it Non-Profit Distributing (NPD) and the Hub Initiative, but these all come under the broad heading of Public Private Partnerships (PPP). In May last year, they announced another rebranding with the Mutual Investment Model (MIM). Another PPP scheme with many of the same problems, as is well covered in a recent Common Weal report.

I and others have written thousands of words on why this model doesn’t work. This archive page on the UNISON Scotland website covers many of my earlier publications. It reminds me that I even used to write a regular briefing called ‘PFI Illusion’. I have to say I didn't expect to be making the same points all these years later. Most recently, in Stockholm a couple of weeks ago. 

I first became interested in PPP as a union organiser covering Lanarkshire Health Board in the 1990s. Two of the three acute hospitals were to be financed by PFI, and I recall a meeting with Lanarkshire MPs explaining why this was a bad idea. Particularly to John Smith MP, who as the MP for Monklands was likely to be the loser because his hospital didn’t have ring-fenced PFI funding.

The fact that PPP schemes are more expensive is not disputed as it once was. As today’s report reminds us even the SFT accepts this:

“The SFT calculated in April 2019 that the lifetime costs (construction cost, ongoing maintenance, plus repayment of borrowing) of NPD and hub private finance projects signed under the pipeline approach were on average about 2.9 times the construction cost of the assets. This compares with lifetime costs of 1.5 times the construction cost when using capital grants and between 1.9 and 2.6 times the construction cost when using public sector borrowing.”

The costs are higher than this as the Audit Scotland report also confirms: "The Scottish public sector is contracted to pay a total of £40.1 billion in annual payments between 1998/99 and 2047/48 under current PFI, NPD and hub privately financed contracts. This is over four times the capital value of the assets developed”

There are also plenty of other risks and problems associated with PPP schemes as the Edinburgh Sick Kids Hospital, and the collapse of Carillion has highlighted. As today's report also concedes projects that involve technology, legislation changes or complex service delivery are unlikely to be suitable. In practice, very few public services remain static for the 25-40 years of a typical PPP project.

The report also points to the reason governments of all colours have persisted. Devolved administrations have always had limited borrowing powers and therefore keeping borrowing off the public balance sheet is attractive. Few Scottish Government ministers in the early years of devolution thought PFI was a good idea, but it was in the parlance of the time, 'the only game in town'.  The Scottish Government now has much higher borrowing powers, which is why it uses PP less, but still insufficient for its capital programme. Hence the new MIM scheme, which they hope will keep these new schemes off-balance sheet.

Even the Tories have given up on PFI, not least because they can borrow very cheaply and they recognised that the projects were not delivering value for money. The solution for Scotland to go the same way is to give the Scottish Government prudential borrowing powers, ending the current limits. That would end the chase for off-balance-sheet financing and invest the savings in our crumbling infrastructure.

Why John McDonnell's PFI pledge is welcome and affordable

John McDonnell caused a stir yesterday with his pledge to bring Private Finance Initiative (PFI) contracts back in house. Commentators who bandy about huge sums of money to pay for this commitment are missing the point.

The shadow chancellor said in his conference speech that Labour had already pledged not to sign any new PFI deals. He then added: “We will go further. I can tell you today, it’s what you’ve been calling for. We’ll bring existing PFI contracts back in-house.”

Unsurprisingly, this was immediately welcomed by UNISON, who campaigned against PFI from the outset, whichever government (Tory, Labour and SNP) used the scheme. Dave Prentis tweeted, “At long last! Our party sees sense on PFI”.

Let’s start by understanding what a PFI scheme is. Instead of borrowing in the normal way, public bodies contract with a consortium of private companies known as a Special Purpose Vehicle, to design, build and operate a public asset - typically schools, hospitals, roads and waste treatment works. The Tories invented the idea, Labour developed it and the SNP use it in Scotland to this day – albeit renamed as NPD or Hubcos. Instead of meeting the borrowing and running costs directly, public bodies pay an annual fee to the contractors.

The scheme has been criticised on many grounds and in the early years the main driver was keeping capital projects off the public sector off the balance sheet. Particularly important in Scotland because of the block grant and led to the saying ‘it’s the only game in town’.

The main problem with PFI is that the private sector can’t borrow as cheaply as the public sector, and of course take a profit. Government can now borrow very cheaply indeed and this had led to calls to refinance such projects. PFI schemes are notoriously secretive, but we know that they are paying interest rates of 7%+, at a time when public bodies could issue bonds at a little over 1%.

UNISON Scotland set out in our ‘Combating Austerity’ plan how this can be done and save millions of pounds of austerity cuts in the process. The Public Accounts Committee at Westminster, hardly a bastion of socialist economics, also highlighted how such refinancing had been achieved in England. Sadly, while some projects have been brought back in-house in Scotland, progress has been glacial, as our progress report this summer shows.

An important forerunner to any contract renegotiations should be stricter monitoring of contracts and restructuring the existing provisions. A number of public bodies in Scotland are beginning to take this seriously, but again more could be done. At UK level John McDonnell could help by committing to changing some of the Treasury rules that make refinancing more difficult than it might be.

That’s why the commitment from Scottish Labour leadership candidate Richard Leonard is so welcome. He said: “Scotland has a huge liability to PFI and the Scottish Government’s Non-Profit Distributing scheme. The Scottish Government could and should set up a debt disposal department dedicated to raising funds to buy out the total outstanding £28.8bn PFI and NPD debt on operational contracts. Doing this could save the public purse hundreds of millions of pounds. If I’m Labour leader I’ll be pressing them on this issue and as a Labour First Minister it will be a priority.”

McDonnell’s actual commitment is fairly modest and doesn’t commit Labour to a massive increase in public spending. That’s because the public sector is already paying over the top for these schemes, so bringing them in-house would actually be a saving to the public purse. As well as giving public bodies control over vital public assets.

Lessons to be learned from Edinburgh PPP schools

Collapsing Edinburgh schools are a metaphor for the folly of PPP schemes that have cost the taxpayers £billions. This latest scandal should be used as an opportunity to think again.

Fears over safety has forced the closure of 17 Edinburgh schools due to concerns over the standard of construction, leaving 7,000 pupils unable to return to classrooms following the Easter break. Every Scottish council is now carrying out surveys of schools that could be affected.

The schools were all built under the same public private partnership contract by Edinburgh Schools Partnership (ESP). This is a Special Purpose Vehicle - essentially a company set up to run this scheme, owned by the partner companies that are responsible for the contract.

This is how most Public Private Partnerships (PPP) are operated. There are a number of different schemes that come under this umbrella term, including PFI, NPD and the Hub Initiative. The common feature is that private companies finance and then operate a public service building for a contracted period, typically 25 years or longer. They were started by the Tories, developed by Labour and continued by the SNP, who have one of the largest PPP programmes in Europe.

While UNISON opposed PPP schemes from the outset, it is only fair to point out that construction failure is not an inherent element in PPP schemes. They can happen with any construction project and we don't at this stage have all the information on the precise problems with these buildings.

However, there are some reasons why such failures are a bigger risk in PPP schemes.

Firstly, the construction company in a PPP scheme is almost always an equity partner of the SPV running the scheme. In effect this means they are both the client and the contractor. Unlike conventional procurement, there is no council or other public service provider performing the supervisory client role.

Secondly, there is a profit incentive to keep costs to the minimum. Any saving that the construction partner can make, increases profits to both the construction company and the other SPV partners. There is therefore a stronger cost saving incentive than in conventional procurement. 

Thirdly, many PPP schemes have been under pressure to cut costs late in the project because of budget overrun. We know that this has resulted in specification cuts, such as fewer beds in PPP hospitals and the loss of planned teaching areas in PPP schools. There is bound to be a concern that this may drive construction changes as well.

Fourthly, PPP schemes tend to use standard designs to keep architectural costs to a minimum. This has been criticised on aesthetic grounds because designs don't always reflect the local setting. It also means that a design feature that fails, could have implications for not one building, but many.

I should emphasise that I don't believe that this means that anyone has deliberately done anything that is unsafe. However, PPP schemes do not have all the checks and balances that happen with conventional procurement.

Our concerns over PPP primarily relate to the inflexibility of long term contracts and cost. In our latest report on this issue late last year, we argue that with interest rates at historic lows, now is an ideal time to review the cost of PPP schemes that were signed when interest rates were much higher. It is now widely accepted and understood that PPP projects have been extremely expensive ways of funding new hospitals and schools. Estimates of how much the public sector could save now through buying out PPP contracts range as high as £12 billion in Scotland.

Whatever the cause of the construction failures in the Edinburgh Schools scheme, this should be yet another wake up call on the inherent weaknesses in this method of funding public services. Bringing PPP schemes into the public sector is a safer and more cost effective solution for public service delivery.