There is a scandal unfolding quietly in this country which poses an existential threat to our most critical public services. It is called the Private Finance Initiative. Today, we look at the dangerous circle of self-interest which means our government is making the tax payer pay the bill for private service providers and banks to take over our schools, hospitals and other core public services.
What is PFI?
PFI stands for Private Finance Initiative. The schemes were initially designed by Tory Chancellor Norman Lamont in 1992 and were rapidly expanded under New Labour. They are touted as a form of Public Private Partnership. The government uses private finance, rather than borrowing in the usual way, to raise funds for projects. Since 1992, our hospitals and schools have been built this way. PFI loans are at least twice the rate of interest of ordinary government loans, and repaid over 25-30 years.
The Truth about PFI
A recent report by the Treasury Committee condemned the Private Finance Initiative, as “always…more expensive than government borrowing”. Furthermore, the report continues “we have not seen clear areas of savings and benefits in other areas…quality was lower in PFI buildings (and)…PFI is also inherently inflexible, especially for NHS projects”.
The report did identify major benefits to PFI unrelated to absolute costs or value for money.
- The majority of PFI debt does not appear in government debt or deficit figures – the government can therefore use it to bury the true debt burden.
- Government departments can use PFI to increase their own budgets without dipping into their allotted funds for capital investment.
Another benefit of PFI is that is allows the private sector to develop the infrastructure to deliver national services while shifting the costs and the risk to the tax payer. Put another way, the tax payer is funding the development of a private network of service providers. For it is the loan provider of the PFI scheme (the Bank) which retains ownership of the asset (the school or hospital) for at least the term of the loan (25-30 years) or in the case of default.
In fact, the only people who are not benefitting from PFI are the people actually paying for it.
The report could not have been clearer “These incentives unrelated to value for money need to be removed”.
They need to be removed because they create a conspiracy of mutual self-interest between private service providers eager to create new markets in publicly run services, banks seeking to make profits on the financialisation of our public services, and successive governments seeking to put a gloss on their spending figures. The simple interests of the tax payer – to get what they pay for – has been quietly abandoned amid this circle jerk of the state, private service providers and the financial services sector.
It Gets Worse
It is actually in the interests of the private service providers and the banks engaging in PFI for the state to default on its payments. In which case, they can retain ownership of the asset – the school, the hospital, the road, the bridge etc. This might draw one to a more sinister interpretation of the “poor quality procurement methods” used by those responsible for negotiating the PFI contracts.
Already, 22 of the 103 NHS trusts to enter PFI are facing financial difficulty due to the exorbitant PFI repayments. Some hospitals are having to handover a fifth of their annual budget on paying for the PFI deal.
Overall, for a capital investment of £54.7bn (that’s how much money we actually borrowed to build stuff), the tax payer will pay back an astounding £301bn in just twenty five years. Given what we have already seen, many of the 771 PFI projects currently running will bust the budgets of these public services long before then, leaving us with the debt but not the service.
The average profit for a Bank on an equivalent capital investment project would be between 1-2%. A recent report by the European Union Services Strategy Unit (EUSSU), showed that the average profit for banks in PFI projects is over 50%.
So why is PFI so profitable for the banks?
Firstly, as we have seen above, the interest rates on the loans are enormous. They are double ordinary government borrowing and the equivalent of using a credit card to build our hospitals and schools.
Secondly, the ‘Special Purpose Vehicles’ or shell companies set up to manage the PFI projects are generally based in offshore tax havens. This means that a tax payer funded enterprise, is itself exempt from paying tax.
So the Banks have become heavily engaged in chasing the PFI pound.
At least 91 pieces of public infrastructure are now owned in this way.
Barclays has joined HSBC in aggressively chasing the PFI pound, setting up its own wealth fund on the back of this rigged market.
As a sign of things to come, one might look at Barnet Council’s ‘Easy Council’ outsourcing project which sees 70% of the Borough’s services handed out to the private sector to exploit in just the same way.
Some might well ask – so what? If the services are still free at the point of use, what do we care who provides them?
This question is so ill conceived, it pains me to even have to counter it. It pains me more that it appears to be the predominant view of an increasingly out of touch electorate, without the knowledge base or the curiosity to appreciate their own mugging.
The service might be free at the point of use, but it is not free. Our taxes pay for the services. PFI, by the Treasury Committee’s own report is proven not to provide value for money for the tax payer. The scale of this cost has seen 4 out of 5 Local Authorities (LA) report that their LA will be in financial trouble by 2014. As reported above, these costs are seeing the closures of hospitals and schools. We are being bankrupted.
As the recent health care disaster in Mid Staffordshire, and the unfolding NHS 111 scandal have taught us – prioritising the financialisation of a service over its core purpose (helping people) costs lives. Real people get poor quality care and die as a result.
The Economy, Stupid
Historically, a national construction project would have created jobs in a domestic construction industry, profits for domestic building and services firms, a publicly owned asset and tax revenues to the Treasury.
Now, the taxpayer forks out double the costs for the build, whilst the profits and in many cases the assets themselves go to an offshore company, which is not eligible to pay taxes in the UK. The money is siphoned out of our economy.
The End Game
Ultimately, as seen in Hinchinbrooke hospital, it is the public and not the private side of the ‘partnership’ that gets the blame when the service inevitably collapses.
Despite being an entirely manufactured cost inefficiency for the benefit of private companies, the PFI scandal is being used by those vested interests as a case for more privatisation. It is turned into proof positive that publicly run services are inherently inefficient, bureaucratic and costly. They claim the answer is to allow the market (those same banks and private service providers who bankrupted the services in the first place) to take over entirely.
Every Day is Christmas Day for the Banks
UK Prime Minister David Cameron recently told the 300 delegates at the Global Investment Conference 2013 that he believed it was time stop “endlessly bashing bankers” because the City was one of Britain’s greatest strengths.
According to the National Audit Office, The UK National Debt rose by £1.5trn as a result of the Bank Bailout. This is twice the nation’s total annual budget. For this amount, the UK could have funded the health service (£106.7bn a year) for fourteen years , the entire education system for forty years (£42bn a year) or over three hundred years of Job Seekers Allowance (£4.9bn a year). Not a single banker has gone to court, let alone to jail. Instead bankers are being let off with fines and the removal of honours, effectively buying their way out of justice.
The bankers needed bailing out not due to some unavoidable natural disaster, but because of their own greed. The bailout was the taxpayer paying down the banking sectors own bad bets, allowing the sector to privatise its profits, but socialise its losses.
Now we find, with PFI, that they have been invited in to pilfer from the tax payer in ever more elaborate ways for more than two decades.
Banker bashing by the public will not and cannot end until this criminal sector, and its cronies in parliament are held to account properly in a court of law. This has not happened, and shows no signs of happening.
The British public needs to face up to a terrifying but empowering reality. We have no advocates. This is not a Tory, a Lib Dem or a Labour issue. This is a democratic issue. All three major parties have participated in these scams, they are all in it together. That’s the terrifying bit.
Now for the empowering bit. We need to really get it in our bones that the cavalry is not coming. We are it. We are the cavalry. Only our newly emerging people’s campaigns and institutions can resolve the crisis, because our existing institutions not only created it, but exist to serve it.
We are only ever as ignorant and powerless as we make ourselves.
Email your local MP/Council – Ask how much they are spending on PFI projects, who those projects are with, where the shell companies are based (are they offshore tax havens) and send this information to this blog (email on the ‘About’ page). We can then publish this information. Not only will you help create the bigger picture of the PFI scandal, but between us we can turn a whisper of discontent into a roar of outrage. We must become as relentless in opposing this corruption as the participants are in furthering it. People who have taken up this challenge are posting their FOI requests here.
Move Your Money – take your money out of your bank. More than 2.3 million people moved their money last year, double the usual number. This means that knowledge of the corruption is having a real impact on consumer behaviour. We enable these banks by keeping our custom with them. Get out, now, and do so loudly.
UK Uncut Legal – support the activism and court cases to bring these scoundrels to justice.
Note of Thanks: Joel Benjamin of Move Your Money supported today’s blog with invaluable research.