Skip to main content

Private gain, public loss

As the First Minister pledges another 100 privately financed schools, Dave Watson challenges the policy as 'manipulation not modernisation'

PUBLIC private partnerships (PPPs) are the umbrella name for a range of initiatives which involve the private sector in the operation of public services. The private finance initiative (PFI) is the most frequently used and has specific Treasury rules that have to be followed.

Labour inherited a substantial commitment to PFI in Scotland. Since its launch in 1992, it has been a lucrative home with schemes exceeding pound;2.5 billion in capital value and much more in the pipeline. Local government is the largest growth area for PFI, most recently in schools thanks to substantial Scottish Executive encouragement including financial subsidy.

The current rationale for PFI stresses value for money to the exclusion of other issues. This is assessed by using a notional public sector comparator (PSC). As all schemes have to demonstrate they are better value than the comparator, it is claimed that PFI represents value for money. However, the methodology is complex and does not always constitute a fair comparison.

In practice, where conventional finance is not likely to be available, there is a perception that PFI is "the only game in town". However, if a scheme were presented to the Executive on that basis it would have to be rejected under PFI rules. This leads officials to engage in the manipulation of the PSC.

Discounting of future cash flows places a higher value on expenditure in earlier years and a lower value in later years. This has a disproportionate effect on the comparator as PFI options are spread over the entire period of the contract.

Risk transfer is the most common method of justifying PFI schemes. In the Glasgow schools scheme, the comparator was pound;35 million cheaper than the PFI option. However, with virtually no justification, pound;70 million was added for the notional value of risk transfer - despite the council underwriting the loan.

One of the most bizarre provisions of PFI schemes is that, if a contractor defaults, it is the public authority that has to compensate the lenders. This is justified by the Treasury on the basis that the authority could make windfall gains through contract termination. However, it effects the value for money comparison as lenders can provide funding to the PFI company knowing that their money is safe.

In local authority schemes it is often claimed that schemes are "revenue neutral". This means that the cost is made up of PFI credits from the Government for the capital element with existing revenue budgets funding the services. In a number of schemes, however, the health trust or local authority has had to fund the difference out of other resources or reduce the services to be provided.

In schools this is done by cutting back facilities. In Glasgow, charges for accommodation in year one grew from pound;24 million in the feasibility study to pound;36.7 million in the full business case (FBC). Seven swimming pools are to be lost along with classrooms and staff commonrooms. The original requirement for refurbishment of 26 schools and the construction of two new schools changed to the construction of 12 new schools as this would be more profitable for the construction company.

A key element of the modernisation of public services ought to be a more transparent and accountable service. Private finance undermines this objective by hiding almost everything under a cloak of secrecy. In June 1999, the Minister for Finance announced that full business cases for schemes signed after that date would be made publicly available. But this does not cover schemes signed before June 1999 and even new schemes are only publishing sanitised versions on the spurious grounds of "commercial confidentiality".

Even "pathfinder" schemes such as the Falkirk schools have not been published. Requests, even from the local MSP, have been refused. The current round of school bids has included at best the partial publication of the outline business case (OBC) and at worst four-page summaries with all figures whited out. If these schemes represent value for money, why the secrecy?

odern public services should also be judged on their employment standards. Yet after the taxpayer (who finances the extra cost of PFI), it is usually low-paid women who suffer the main consequences when they are transferred or are subsequently employed by PFI companies.

Following recent Government policy changes, staff transfer should only take place where it represents value for money. But in Glasgow Government policy was ignored and councillors were told that staff had to move to achieve the necessary risk transfer. The same approach is being applied in the current round of PFI bids.

The key themes for modernising government, outlined in December 1999 by Jack McConnell when he was the Finance Minister, were partnership, openness and accountability, inclusion and delivery. The extensive use of private finance is incompatible with this vision. Partnership working is difficult to achieve when the staff team is broken up, the very design of PFI limits openness and accountability, social inclusion will not be promoted by cutting pay and conditions of predominantly low-paid workers, and we have growing evidence of inefficient delivery from the Skye bridge to sewage works and hospitals.

Public service workers have no problem with modernisation. In fact they embrace it. However, private finance makes no significant contribution. It manipulates not modernises our public services.

Dave Watson is Unison's Scottish policy and information officer.

Log in or register for FREE to continue reading.

It only takes a moment and you'll get access to more news, plus courses, jobs and teaching resources tailored to you