George Monbiot (Guardian Utd): A roaring failure

[Jack Rabbit]

From the Guardian Unlimited


A roaring failure
Private finance deals in public services have led to staggering corporate profits
By George Monbiot

Two years ago I accused the British government in this column of nine kinds of fraud and false accounting, arising from its private finance initiative. If any of these charges were false, I suggested, the chancellor of the exchequer should repudiate them. If he failed to do so, the Guardian's readers should conclude that he had no defence to offer.
Neither the chancellor nor anyone else in the government responded. Since then, several reports laying down even graver charges have been published. The government has ignored them, and the opposition has left it in peace. The Conservatives invented the private finance initiative, so they are silenced by their complicity. The Liberal Democrats have challenged some of the details of the scheme, but not the principles behind it. The trade unions, the Greens and Plaid Cymru oppose it, but if a policy doesn't divide the major parties, it doesn't make the news. Public bodies, which depend on money from the initiative, won't criticise it openly. We listen for informed dissent, but we hear only the great shuffling sound of the establishment closing ranks. Corporations, with the Treasury's help, are robbing the public of tens of billions of pounds. And they are getting away with it.

The private finance initiative is supposed to allow the government to commission public services it wouldn't otherwise be able to afford. Private companies put up the money, build the new prisons or hospitals or underground trains we need, and run them for the next 25 or 30 years. The government pays them the rent and service charges. By this means, the Treasury claims, new money is poured into public services. As the private sector is more efficient than the public sector, they can run our public services more cheaply than the state could.

That's the theory. The practice, as innumerable studies have shown, is rather different. Instead of being led by public need, many private finance initiative projects have been designed to generate as much private profit as possible. In some cases cheap schemes, such as the renovation of a hospital, have been rejected because they are insufficiently profitable, and replaced with more lavish projects, such as demolition and rebuilding. The Walsgrave hospital in Coventry, for example, which was to have been refurbished at a cost of £30m, was instead knocked down and rebuilt at a cost of £330m, solely in order to make the project attractive to private companies. In other cases the contracts have been so generous that the companies have been able to extract staggering rates of return. The consortium which built Altcourse prison in Liverpool broke even two and a half years into the 25-year contract: it is now enjoying 22 years of pure profit. The companies which built the Norfolk and Norwich University hospital were able to extract tens of millions of pounds from the scheme through a technique called "refinancing" before the hospital had even opened.

Read more.

A personal note: Having worked for and with government and for private industry large and small, I can say by my experience that large private companies are not more efficient than government. Like the government, large industries feel the need to control the use of their resources and it seems as though the powers are more concerned with laying the red tape down neatly and making sure that every i is dotted and every t crossed than they are with actually producing a halfway decent product.

The idea that private industry is more efficient than government is a lot of hooey. Each is both dreadful, bureaucratic morass.

[muriel_volestrangler]

1. Another article on this

A shining exception to the media's failure to get to grips with the PFI scandal has been Private Eye. The current issue contains an 11-page 'idiot's guide' by Paul Foot to the buck-passing and buck-pocketing which PFI has brought to the public sector. Anyone who wants to know why their children and grandchildren will be paying for the folly of this generation of politicians should read it.
...
You can get most of the way towards an explanation. The PFI is an Enron-style off-balance sheet accounting scam. It's cheaper for the Government than private consortia to borrow. But by allowing the private sector to go to the money markets, the Government can get debts off the public-sector borrowing requirement, even though the public pays in the end.

http://society.guardian.co.uk/comment/story/0,7884,1180423,00.html

I highly recommend the Private Eye supplement to anyone who can get hold of it (it's not on the Web, as far as I can tell). And it does show how much of an accounting scam PFI is:

It was agreed that if the risk was genuinely transferred to private consortia, nothing need appear on the government balance sheet. ... Paul Boateng, chief secretary to the Treasury, gave a list of PFI contracts operational at the end of the 2001-02 financial year and the accounting treatment that had been adopted for them. Of the ten hospital contracts mentioned, nine were off balance sheet. These included the new Norfolk and Norwich hospital (capital value £158m) and the Queen Elizabeth Hospital in Woolwich (£118m).

So all these projects were not accounted for in the government accounts. But here's a strange fact. They are not accounted for in the accounts of the consortia either. There is no reference on the balance sheet of Octagon, the consortium that built the Norfolk and Norwich hospital, of any such hospital. Indeed, the Eye understands that none of the big PFI hospitals taken off the government balance sheet appear on any balance sheets of the consortia that built them. They have simply vanished into a black hole. Why?

One answer may be a new tax dodge called "corporate trader status", sanctioned by the Treasury in late 2003 and keenly promoted by the accountancy firms. If a company can show corporate trader status, it can get tax relief on the entire cost of a PFI project, as opposed to the 30 or 40 percent it would otherwise get.

In the case of the Norfolk and Norwich hospital, corporate trader status would save the company (and cost the taxpayer) £30m to £40m.
...
To achieve corporate trader status, companies cannot keep the assets built by PFI on their books. And under accountancy rules they can only keep them off if they don't carry the risk of the PFI deal. So the companies like Octagon that keep the assets off their balance sheet are saying that the risks of PFI stay with the taxpayer, thus defeating the primary objective of PFI and effectively calling the government accounts incorrect into the bargain.