25 years after Private Finance Initiative contracts were introduced by the Conservative government, the National Audit Office (NAO) has finally revealed, to the surprise of absolutely nobody, that they are tear-jerkingly expensive.
Private Finance Initiatives are a method of Public Private Partnership, whereby a public project is funded by private equity, which is then paid back, plus an extortionate amount of interest, by the public sector over the life of the project.
In normal public procurement, the Government essentially pays the private sector, companies like Carillion, to build a public asset – be it a road or a school or a hospital.
With PFI, a Special Purpose Vehicle (SPV) – a private company – is formed, which raises finance to construct the asset. Once it’s constructed, the Government pay unitary charges to the SPV over the contract period, which is usually 25 to 30 years, to maintain and run the asset.
At the moment, there are around 700 PFI contracts in existence, which have a capital value of £60bn. The NAO states that they will represent around a £10bn cost to the Government per year. By the year 2040, even if no new PFI contracts are entered into, future charges will amount to £199bn.
This is no revelation to those administering and monitoring PFI contracts, though. Indeed, it is their very purpose. PFI contract liabilities don’t form part of the deficit balance sheet.
PFI contracts allow a Government to delay and spread the cost of constructing public assets at the cost of vast increases in interest later on. In return, risk is meant to be shifted to the private sector.
Of course, it isn’t. The Government is the lender and the buyer of last resort. Innumerable are the examples of the Government bailing out private entities that have overstretched in attempting to run a public service.
Not only this, but the Government incurs the cost of paying for maintenance, cleaning and catering contracts, which are often below standard. This because the private company is necessarily motivated by profit, and so cuts cost to boost its bottom line.
In the light of the Carillion failure, and the fallout in terms of jobs, pensions and stalling public projects, the NAO’s report into the costs of Public Private Partnerships (PPPs) generally, and PFI contracts specifically, is but another nail in the coffin for neoliberal economics – a nail which surely signals the beginning of the end for private sector outsourcing.
However, despite the now monumental public opposition to such financially wasteful schemes, the Tories continue to apply the same PFI logic to health provision, seeking to outsource resource allocation in healthcare by using Accountable Care Organisations, which will be governed by commercial contracts rather than statute, making them all but unaccountable to the people.
The NAO report has highlighted that PFI contracts are inflexible and if the Government decides the long-term costs are indeed too much, they are near-impossible to get out of. To buy out of a PFI contract requires upfront payments to the SPV, which most departments are unwilling to make.
PFI and public procurement generally are just another in the raft of sad examples of a Government utterly dependent on the private sector. They are but a shady bookkeeping technique that allows massive corporations control over the public sector, to drive down standards, to crush union-workers, to siphon huge amounts of taxpayer’s money into the pockets of already-wealthy individuals, and, eventually, to be bailed out of the contract if they fail to fulfil.
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