Go to any website on personal debt and the advice is “It can be tough to face up to your financial situation, but it’s an important first step.” Not so with politicians and PFI debt…
There was much talk about risk of future privatisation of the NHS in the recent election campaign. But precious little about the existing privatisation in the form of the Private Finance Initiative (PFI), which continues to infect NHS and other public services.
PFI was introduced by the Conservatives under John Major, but it really took off when it was developed enthusiastically by Labour under Tony Blair and Gordon Brown. Now it’s not so popular. Yet while all political parties talk about sums of money they will “give” the NHS, none wants to talk about the toxic legacy of PFI debt.
Even a House of Commons Library research paper now describes PFI as a “controversial approach” to building and maintaining new infrastructure, such as schools, hospitals, roads and prisons. Under a PFI contract, the private company handles the up-front costs instead of the government. The project is then leased to the public. And via our taxes, annual payments are made to the private company.
The scale of PFI is mind-boggling. In 2018 the National Audit Office reported that there are over 700 operational PFI deals with a capital value of around £60 billion. Annual charges for these deals amounted to £10.3 billion in 2016-17.
Extracting the figures for just the NHS in England, the Institute for Public Policy found that an initial £13 billion of private sector-funded investment in new hospitals will end up costing £80 billion by the time all contracts come to an end. As we start the year 2020, £55 billion of that sum is outstanding.
The legacy of debt is staggering but what about the quality of the actual buildings or roads produced under this system? And what about the services which were often incorporated as part of the deal such as cleaning and catering?
There are too many reports on the poor quality of PFI buildings to include in this article. But the 2017 Report of the Independent Inquiry into the Construction of Edinburgh Schools is worth close scrutiny.
Chaired by construction expert Professor John Cole, the inquiry investigated the causes and implications of the collapse of part of an external wall at Oxgangs Primary School Edinburgh. That had led to the discovery of similar defects in the construction of the external walls of 16 other PFI schools in Edinburgh, resulting in the enforced closure of all 17 schools.
In one of its conclusions, the inquiry pointed to the likelihood of problems elsewhere: “The Inquiry is of the view that, given the widespread nature of similar defective construction across the […] projects, undertaken by bricklayers from different sub-contracting companies, and from different squads within these companies, there is evidence of a problem in ensuring the appropriate quality in this fundamental area of construction.”
And so, it continued, “the Inquiry has come to the view that, it is insufficient for public sector clients with a responsibility to protect the safety of the communities they serve, to rely solely on the quality assurance processes of contractors…”
That’s slightly missing the point. The whole PFI process incites the public sector to wash its hands of its responsibilities to the communities it is supposed to serve.
To add insult to the injury of poor quality building, the National Audit Office report of 2018 describes “higher maintenance spending in PFI hospitals”. This applies to routine maintenance costs built into PFI contracts, as well as costs related to poor building quality. Likewise, the privately provided catering or cleaning services come at a higher cost than in-house services.
John Major’s government both ratified the Maastricht Treaty, which gave birth to the euro currency, and introduced the Private Finance Initiative (PFI) to our public sector. And there is a close connection between the two.
The Maastricht Treaty dictated limits on government debt and deficit as a proportion of gross domestic product (GDP). Once public spending was curtailed, governments across Europe turned to the financial sector for private investment in infrastructure, and 15 EU member states now have PFIs.
The “clever” thing about PFIs for devious governments is that since the expenditure is by companies, with repayments lasting decades, they don’t count as public spending. Nor do they count as public borrowing.
From the very beginning, finance capital in the City of London saw opportunities to make profit and was keen to advocate PFIs at home and abroad. As the pressure mounted for all EU countries to join the euro, the requirement to reduce public sector borrowing increased the pressure for PFIs.
And when the Labour government came to power in 1997 the number of PFIs rose year by year. As Alan Milburn, then a Labour health minister, said in 1997, “When there is a limited amount of public-sector capital available, as there is, it’s PFI or bust”.
The result is that the UK now has the third highest number of what are referred to as “off balance sheet” PFIs across Europe. To fully appreciate this, you need to know that the European Union has its own unique European System of Accounts (ESA.)
In everyday speech one might call the ESA system “off the books” or “funny money”, but the technical term is “off balance sheet”. A helpful footnote in minuscule print on page 11 of the 2018 National Audit Office report explains it thus: “Most PFI debt is scored as off-balance sheet under the European system of accounts (ESA), which determines government debt levels. However, under the International Financial Reporting Standards (IFRS), used to report financial accounts and the Whole of Government accounts, most PFI debt is on-balance sheet.”
So there you have it. In EU terms “off balance sheet” means sums which in normal accounting would be “on balance sheet”. And what sums they are. Even if no new deals are entered into, future charges – which continue until the 2040s – amount to £199 billion.
A great rate of return for the private companies, an appallingly bad deal for the public sector. The worst of all worlds: PFI and bust.
In the 2018 Budget, Chancellor Philip Hammond announced he was abolishing the use of PFI for future building projects. This announcement is on the House of Commons website under the heading “Goodbye PFI” – it presumably doesn’t do irony as we are left to grapple with the toxic legacy for two more decades.
Three vital steps
Do not underestimate the financial vultures who have enjoyed, and will continue to enjoy, the dividends of these schemes. They will surely be busy in the City of London designing other financial “vehicles” for funding future infrastructure projects. Be ready to fight a future incarnation of PFI. So that’s Step 1: Be on your guard.
‘The worst of all worlds: PFI and bust…’
PFI payments are particularly damaging for some hospital trusts. For example, Sherwood Forest Hospitals NHS Foundation Trust in Nottinghamshire has a £326 million PFI deal that costs it £50.3 million a year in repayments and eats up the largest proportion of its budget of any trust – 16.51 per cent. Barts Health NHS Trust in London has the largest health PFI and spends £116 million a year servicing its debt, 7.66 per cent of its income.
To fight the toxic legacy of PFI, communities, public sector workers and their unions need to understand how it directly affects their own area. It depends on where you live: PFI debt is truly a postcode lottery. That’s Step 2: Find out about your local PFIs.
That leads to Step 3: There must be a demand for the government to buy out PFI schemes. It can be done. PFI deals have been paid off – for example Tees, Esk and Wear Valley NHS Trust paid off its PFI scheme in 2011 and saved itself around £1.4 million a year in repayments. And in 2011, Northumbria Healthcare NHS Foundation Trust paid off its PFI by borrowing money from a local authority, thereby saving around £67 million over 20 years in repayments.
These two contracts had exit clauses, but many PFI contracts do not. So the demand must be radical. If the government can use the Bank of England for quantitative easing, there must be a way to pay off a PFI.
The Institute for Public Policy Research sets out a range of policy options favouring an enfranchisement approach, encouraging the government to legislate against unfair contracts as in the case of payday lenders.
But report writing does not lead to action. Only an understanding among workers of the why and the how of PFIs can give birth to determined demands to deal with the situation. Have trade unions tired of the PFI battle? Maybe, but if it is eating up nearly 20 per cent of the income of your organisation how can you ignore it?
Action on this toxic legacy is more important than the exact mechanism. Each PFI is a festering pustule on the body politic and they all need picking off. It could be in one mighty blow – but in all likelihood not before a start has been made on individual PFIs around the country, one by one.