[ACCA Global] the Private Finance Initiative - A Briefing
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7/31/2019 [ACCA Global] the Private Finance Initiative - A Briefing
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THE PRIVATE FINANCE INITIATIVE
A briefing
September 2002
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ACCA is the largest, fastest growing, global professional accountancy body, with
nearly 320,000 members and students in 160 countries. ACCA headquarters is
in London and it has 34 staffed offices and 34 active centres around the world.
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accountancy profession, to promote the highest ethical and governancestandards and to work in the public interest.
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The Association of Chartered Certified Accountants
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tel: 020 7396 7000 fax: 020 7396 7070
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Introduction
The Private Finance Initiative (PFI) has been shrouded in controversy since its
inception in 1992. Opinion is at best divided on the value of using PFI tofinance and improve the quality of public services.
In a recent survey of ACCA members working in the UK public sector only one
percent of the respondents strongly agreed that PFI generally provides value for
money whilst well over half of the respondents disagreed with this statement. In
a survey undertaken by the magazine Public Finance last Autumn, only one in
ten senior public sector finance managers agreed that:
"PFI and other forms of Public-Private Partnerships are having abeneficial effect on public services."
James Stuart, Chief Executive of Partnerships UK, admitted last year that the
government faces an uphill task in convincing the public of the need for PFI
deals. A recent pubic opinion survey found that 2 in 3 public feel that in
general public services should not be run for a profit.
Whether using PFI will provide public services efficiently is still largely a
political rather than professional opinion as there is so little evidence of the
outcome of such agreements. In a report1 last year the Audit Commission
stated that it was "too early to say whether PFI contracts generally offer the
public sector long-term value for money". The UK government is, however,
convinced that "the private and voluntary sectors can play a rolewhere use of
them can improve public services, nothing should stand in the way of their
use"2. As a result, in the short-term at least, the Public Finance Initiative (PFI)
is often the "only show in town", in that it is only this approach that will gain
HM Treasury approval for much needed capital investment.
1Building for the Future, PFI Management Paper, Audit Commission June 20012 Tony Blair in a speech to public sector employees, 16 October 2001
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The Commission on Public Private Partnerships3 commented that there should
be "an evidenced based approach to policy. A commitment is necessary to
pilot, monitor, and systematically evaluate a spectrum of partnership
arrangements. Depending on the evidence that emerges PPPs could be rolled
out or rolled back".
ARGUMENTS FOR THE PRIVATE FINANCE INITIATIVE
PFI was developed and was seen as attractive by the Labour Party
administration in 1997 as it appeared to be able to reconcile two apparently
conflicting objectives:
to significantly increase the investment in public services to maintain the national debt at a prudent level compared to the GDP.
The main arguments for PFI are now that it:
provides value for money by bringing private sector expertise in tomanage public services
provides the finance for significant investment in public services whichwould otherwise not be possible
and
allows a significant level of risk to be transferred to the private sector.
3 Institute for Public Policy Research, Building Better Partnerships: The final Report of the
Commission on Public Private Partnerships, July 2001
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THE MERITS OF THESE ARGUMENTS - A DISCUSSION
The question of whether PFI can actually provide value for money in the
procurement and provision of public services is discussed in the first section
below. Before any PFI project is approved it must be subjected to a comparison
with the costs that are assumed would be incurred if the project involved atraditional approach to public sector procurement. This evaluation of the
relative merits of the PFI and the Public Sector Comparator are considered in
the second section below.
UK public finances have fundamentally changed since 1997, the national debt
is now little more than 30% of GDP compared with Gordon Brown's prudent
level of 40%. Thus the government could borrow an additional 300 billion
without breaching this target. This compares with the capital value of 22
billion for the UK PFI schemes that have been completed so far and the 14billion of further schemes where formal contacts had been signed by July
20024. The issue of whether PFI will allow more public sector investment in a
shorter time-scale is considered further in section three below.
The fourth section of this briefing deals with the issue of the transfer of public
sector risks to the private sector. The final section is an article from a recent
edition of Public Finance which discusses the effects of PFI schemes on the
public sector employees directly involved.
4 OGC website July 2002
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SECTION ONE:
Does PFI provide value for money?
The government argues that partnerships with the private sector will ensure that
public services are provided more efficiently and so achieve greater value for
money. However, if we look at the structure of PFI projects it is hard to see
where this value for money can come from. In addition, if PFI is so efficient,
why does the government provide subsidies to public sector organisations that
use the PFI route? Finally why does the government not allow public sector
organisations a free choice on whether to use PFI or to finance their capital
investment directly?
If we take the example of a PFI hospital project, a PFI project will typically
include the provision of a new building and the services associated with that
building. This can include, for example, cleaning maintenance, heating, public
utilities and ancillary services for example, catering. Under PFI, the
accommodation would be designed by architects in consultation with health
managers and other users and built by a construction firm. Under traditional
procurement methods essentially the same approach would have been adopted.
The PFI project will also usually include all the associated non-clinical services
that will be required in the building over the life of the contract. In many
hospitals these services are already outsourced to a private sector provider.
With PFI, all these contractors are chosen as a job lot as they combine
themselves into a consortium to bid for the project. This may provide less value
for money as the trust may not be able to choose the optimum combination of
private contractors. A company that is very efficient at providing cleaning
services may not be as cost effective at providing building maintenance. In
addition, the financing of PFI schemes is estimated to cost at least one or two
percentage points more than if the money had been borrowed centrally by the
Treasury, as happens in traditional capital schemes.
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Competitive pressure will also be significantly reduced with PFI schemes as
these are usually for 30 or more years rather than three to five years for a
typical service contract. The long-term nature of PFI contracts means that,
however poor the value for money they provide, there is no escape route.
Possibly because of this, the government provides a range of subsidies that
mean that even if an individual PFI project is not cost effective, it will at leastcost less, for the particular organisation, than the traditional direct procurement
option.
In central government and the NHS, if the PFI route is chosen the NHS trust,
for example, will be able to reclaim any VAT they have paid to the PFI
contractor. If a new hospital is contracted for directly, the construction costs
are also liable for VAT, only in this case the VAT is not reclaimable by the trust.
This results in a government subsidy of 17.5% towards the construction costs
of all hospitals built under PFI.
In addition, each year NHS trusts (and central government departments) have
to pay capital charges of 6% of the value of their capital assets. These capital
charges are paid back to HM Treasury funds and so they can be re-cycled to
fund other public services. Capital charges are not due on PFI projects, an
effective subsidy to the trust of 6% of the capital costs of each PFI project.
In English local government, the subsidy is even clearer, if not so generous.
Special Grant Report No. 765 details the objectives of this subsidy as follows:
"to assist local authorities in England to meet that part of their
expenditure under private finance transactions which is attributable
to the capital element of the project costs."
This special grant scheme provides an annual grant to local authorities of
11.5% of the notional credit approval for their PFI schemes (in broad terms the
capital value of these schemes).
5Special Grant Report (No.76), Local Government Finance (England), DETR February 2001
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Despite these subsidies, public sector organisations are still not given the
freedom to choose the option that they consider will provide them with better
value for money. Capital finance or approval to borrow to invest is rarely
available and so PFI is seen as the only game in town. If investment is needed
it is PFI or nothing.
Even the recent IPPR report6, which is convinced of the benefits of public
private partnerships, recommends that:
'Government departments should be set an overall capital spending
budget that encompasses both traditional financed spending and the
capital value of PFI spending.'
and:
'PFI projects should not go ahead because a public authority believes
there is no alternative.'
The report also calls for
'an evidenced-based approach to policy. A commitment is necessary to
pilot, monitor, and systematically evaluate a spectrum of partnership
arrangements. Depending on the evidence that emerges PPPs [including
PFI projects] could be rolled out or rolled back.'
This seems to be a sensible idea. Instead of continuing to push through PFI
schemes, careful consideration should be given to the actual value for money
that existing schemes are providing. It does not appear prudent for the
government to ensure that the vast bulk of its capital investment is undertaken
via PFI without first undertaking a detailed study of the relative success of the
schemes that are currently in operation.
6 Institute for Public Policy Research, Building Better Partnerships: The final Report of the
Commission on Public Private Partnerships, July 2001
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SECTION TWO:
PFI and the Public Sector Comparator:
are comparisons objective?
Since 1997, when the current government was first elected, 85% of the funds
for major NHS capital projects have come from PFI schemes. In each case the
costs of the PFI scheme have been compared with an estimate of the costs of
procuring the project by conventional means (the public sector comparator).
For a PFI scheme to obtain the go-ahead, this comparison has had to show
that, over the life of the scheme, the PFI option will be more economic than the
public sector comparator (PSC). In addition, the PFI scheme must also be
shown to be affordable.
Accountants are responsible for undertaking these comparisons and for ensuring
that they are objective. Readers of their reports will depend on the accountant's
professional integrity. However, a range of recent publications has suggested
that the financial appraisals that have been undertaken have been skewed in
favour of the PFI option. This may be in the short-term interests of the
particular NHS trust, but in may not be in the longer term interests of the
taxpayer or the longer-term image of accountants. Will accountants be blamed
if PFI schemes turn out to be more expensive than the alternative methods ofprocurement that they 'proved' did not provide value for money?
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In fact this is already happening. An a briefing paper from the BMA7 stated
that:
"Evidence continues to show that PFI hospital schemes are unnecessarily
expensive, and our concerns about affordability, value for money,
inflexibility, risk transfers and service cuts have not been satisfactorilyaddressed. Neither the advantages originally claimed for PFI nor the
improvements introduced by the government are likely to outweigh these
concerns."
The approach to assessing the value for money of a potential PFI scheme could
be considered to be biased in favour of the PFI alternative. The comparison is
undertaken by calculating the net present cost (NPC) of the two alternatives.
The costs of the PFI alternative are discounted as they occur over the, typically
30-year, lifetime of the project. In contrast, the capital funding of the publicsector comparator is not discounted as all the expenditure is assumed to occur
at the beginning of the project period (although it would almost certainly be
funded by an Exchequer loan).
In addition, a constant discount rate of 6% has been used since 1991 for
option appraisals in the NHS despite the significant fall in general interest rates
over the last few years. The viability of PFI schemes are very sensitive to the
discount rate that is used. None of the first 11 PFI schemes in the NHS would
have been considered to provide value for money if the discount rate used had
been 5% rather than 6%8.
7 Parliamentary Unit briefing papers, British Medical Association Funding - the NHS andpublic-private partnerships; September 20018 Sussex J. The Economics of the Private Finance Initiative; Office of Health Economics (April
2001).
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The government cites risk transfer as one of the main advantages of the PFI
approach to financing capital investment in the public sector. Indeed, without
it the case for PFI would fall in every project appraised. This is because the
cost of the risk transferred to the private sector is added to the cost of the
public sector comparator. The cost of the PFI project includes these risks and
so the PSC should be adjusted to include them as well.
However, there is little official guidance on how to calculate the risk transferred
and the publicly available evidence on the risk analysis and transfer actually
undertaken is very limited9.
Two risks that are often cited as being transferred to the private sector
contractor with a PFI project are:
delays in completing the projectand
cost overruns for the project.There is some evidence that the costs of these risks have been exaggerated, for
example, capital cost overruns on conventionally financed NHS construction
projects averaged 7% in the late 1990s. In contrast a cost overrun of 12.5% or
more is added to the cost of the public sector comparator for most NHS PFI
schemes10. The Treasury guidance (the 'Green Book') is currently being revised
and the private sector argument for an increase in the risk of cost overruns is
expected to be treated sympathetically11.
Other ways in which the figures may have been adjusted to indicate that the
PFI option provide greater value for money include assuming:
9 Allyson Pollock, Jean Shaoul, David Rowland, and Stewart Player Public Services and thePrivate Sector: a response to the IPPR; Catalyst www.catalyst-trust.co.uk November 200110 Sussex J. op cit11 Public Finance October 26 - November 1 2001 page 8
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a building life for the PSC of 45 rather than the usual 60 years, for example,the Royal Infirmary of Edinburgh
the opportunity cost of the land and buildings should be added to the PSC the cost of risks such as not meeting clinical saving targets or medical
litigation are to be born by the private partner, but not subsequently
transferred under the PFI contract
a variety of other unspecified risks are transferred to the private sector andthus added to the cost of the PSC
there will be no efficiency improvements over the life of the conventionallyprocured project
revising the PSC costs in the light of PFI bidsand
using market costs rather than actual current costs for the PSC.The other test that a PFI scheme has to pass is that of affordability. Again
there is evidence of creative accounting to show that the PFI scheme will be
affordable, this has included:
assuming a smaller hospital (with fewer beds)will meet future demand. AllPFI schemes have reduced the planned bed numbers as negotiations have
proceeded from the Outline Business Case (OBC)to financial closure, for
example, in Worcestershire a PFI funded hospital will have one-third fewer
acute beds than indicated in the OBC12
12 Froud J, and Shaoul J.Appraising & Evaluating PFI for NHS Hospitals; Financial
Accountability & Management (August 2001).
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additional funds being provided to the Trusts to cover the additional costs ofthe scheme in the early years
equipment for PFI schemes being funded from NHS block grantsand
assuming demanding reductions in the Trust's clinical costs to meet the PFItariff costs.
Accountants have a responsibility to provide financial information, within the
appropriate rules and regulations, that will further the aims and objectives of
their organisation. However, there may be conflicts and tensions with the
practice of creative accounting. There are also limits to how far it should be
taken without accountants coming up against their professional ethicalresponsibilities.
Jeremy Colman, assistant controller and auditor-general was reported recently
as saying that public sector comparators suffer from "spurious precision". He
went on to say the value for money exercises were "pseudo-scientific mumbo-
jumbo where the financial modelling takes over from thinking It becomes so
complicated that no one, not even the experts, really understands what is going
on". Finally he stated that "People have to prove value for money to get a PFI
deal. But because that is wrongly seen to be demonstrated only by the public
sector comparator, it becomes everything. If the answer comes out wrong you
don't get your project. So the answer doesn't come out wrong very often"13.
13Financial Times, 5 June 2002
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There may also be conflicts between the current requirements and the future
obligations of an NHS Trust. It may appear that capital investment is required
and that the PFI route is the only one that will gain approval. However, PFI,
although initially costing less in the early years of the project, may be more
expensive in the longer run when the capital charges of the traditionally
procured alternative would have dropped to much lower levels. Capital chargesin the NHS are based on the declining balance of depreciate costs and so are
front end loaded and reduce over the period that the asset is held.
In addition, each time a proposal is put forward that indicates that a PFI
scheme should provide greater value for money this reinforces the government's
view that PFI is the most efficient procurement route.
If this is in fact not the case this will have an adverse effect on the longer-term
availability of funds for capital investment as well as revenue funding for theNHS. The costs of PFI schemes will be an obligation for decades to come. In
addition, the more the government is provided with, possibly, subjective,
evidence of the value for money of PFI projects the more they will consider that
this is the standard approach that should be adopted. Again this could be at
the cost to future taxpayers who will be required to fund these PFI projects.
Accountants involved in assessing possible PFI schemes should consider
carefully the objectivity of the evidence that they are responsible for producing.
They should also consider their responsibilities to the longer-term public interest
in general rather than the short-term interests of their particular organisation.
Accountants may feel that they are under undue pressure to produce figures
that will 'prove' that the PFI scheme provides value for money and will be
affordable. If they consider that these pressures are such that they are being
pushed into breaking their professional code of conduct they should seek
assistance.
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SECTION THREE:
Does PFI allow more public sector
investment?Gordon Brown sets great store by 'prudence'. In this article I will argue,
however, that current levels of public investment do not provide an example of
prudent management of public finances. Capital investment in UK public
services recently reached a post-war low as a share of GDP14 and they are now
at recklessly low levels.
Gordon Brown claimed recently that 'public investment [is] being enhanced by
an additional amount of private investment, that leads in some cases to moving
forward with projects more quickly'15 John Prescott also defended public-
private partnerships recently asking 'What is the price of not involving private
finance? The real price is leaky overcrowded classrooms delayed operations
delayed journeys and a lack of care services.'16 In contrast, I want to
argue that the private finance initiative (PFI) and other forms of public-private
partnerships do not enable additional, higher, levels of investment in public
infrastructure.
In reality, one aspect of these schemes is that they are just another form of
state borrowing. They are not clever schemes of off-balance sheet financingthat magically combine high levels of public investment and apparently low
levels of public borrowing.
14 Institute For Fiscal Studies, Twenty-Five Years of Falling Investment? Briefing Note No. 20,November 2001, page 215The Times, Tuesday 5February 2002, page 616The Guardian Saturday 2 February 2002
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Since becoming the Chancellor of the Exchequer, in May 1997, Gordon Brown
has defined his prudent approach to public finance through two strict fiscal
'rules':
the golden rule: over the economic cycle, the government will borrow only toinvest and not to fund current spending
the sustainable investment rule: over the economic cycle, the ratio of netpublic sector debt to GDP will be set at a stable and prudent level, defined
by the Chancellor as 40 per cent of GDP.
The government has provided no justification for a net debt target of 40 per
cent of GDP it could just as easily have chosen 35 per cent or 45 per cent.
The Maastricht Treaty, for instance, allows UK gross general government debt
of no more than 60 per cent of GDP. This is consistent with net public debtbeing considerably higher than 40 per cent of GDP17. Historically 40% is a
very low level. For most of the century between 1750 and 1850 and for much
of the 20th century the UK national debt was worth more than 100% of its
national income. During the Second World War it peaked at over double the
national income.
Fig 1: Net UK debt as a percentage of GDP18
17 Institute for Fiscal Studies, The Government's Fiscal Rules, Briefing Note No. 16, April
2001, page 218 Office for National Statistics, Public Sector Finances August 2002, 19 September 2002
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When Gordon came into office, net public sector debt stood at nearly 45%
having grown fairly consistently of the last five years of the Conservative
administration. It has since fallen equally consistently and over the last 18
months has stayed at just above 30% (see Figure 1). The government expects
it to stay at this level until at least 200719.
Over the longer-term, the trend is if anything even clearer. Public Investment as
a Percentage of GDP fell fairly consistently from around 1967 to 2000 (see
Figure 2). By April 2002, the UK had the lowest level of public investment of
any major EU country. Much of this fall in public sector investment can be
explained as being a result of transferring functions away from the public sector.
Housing investment, for example, has been transferred from local authorities to
housing associations.
Figure 2: Public Investment including Capital Spending by the PrivateSector under the PFI as a Percentage of GDP, 1963200020
19 HM Treasury, Chapter 2, Budget Statement, April 200220 Institute for Fiscal Studies, Twenty-Five Years of Falling Investment? Briefing Note No. 20,
November 2001, page 6.
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However, capital investment in health and education has also fallen
significantly over the last 25 years. In 2000 capital investment in the NHS as
a percentage of GDP was approximately half its level in 1992 and at a lower
level than at any time since the early sixties21. In education, after allowing for
changes in the funding regime for further and higher education, capital
investment in 2000 as a percentage of GDP was still only one-third of its levelin 197322.
These low levels of capital investment mirror relatively low levels of overall
public spending on health and education in the UK. In 1998, Japan spent
approximately 75% more per year on each of its primary pupils and nearly 30%
more per year on each of its secondary pupils23. The USA spends a higher
proportion of its national income onpublic health services than the UK. In total
USA spending on health is nearly twice the level in the UK24.
The private finance initiative (PFI) has been used by central government over
the last five years to increase the use of the private sector in the delivery of
public services. PFI is used to buy services and public facilities from a
consortium of construction companies, financiers and service providers. The
public authority contracts with the private consortium to design, build and
operate schools, hospitals or other services.
Unlike previous public sector building programmes which were funded by
central government borrowing, under PFI the private consortium raises the
money to build the new hospitals or schools, for example, from bank loans and
through shareholders.
21 Institute for Fiscal Studies, Twenty-Five Years of Falling Investment? Briefing Note No. 20,
November 2001, page 19.22 Ibid., page 24.23 OECD, Education at a Glance, Paris 200124 Derek Wanless, Securing Our Future Health Draft report 2001
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PFI has had only a minimal effect on the overall level of capital spending as
Figure 2 above shows and there is little justification for using private finance in
terms of maintaining a prudent level of public sector borrowing. All PFI capital
works undertaken during 1999-2002 could have been replaced by traditionally
government borrowing without breaking the either the golden rule or sustainable
investment rule25.
The government could borrow an additional 300 billion pounds without
breaching its 40% of GDP rule. In contrast, the government is hoping for PFI to
deliver only 10.8 billion of capital investment in public services over the three
years from 2001-02 to 2003-0426.
Within the Health Service, Department of Health figures show that PFI projects
agreed in 2000/01 financed capital investment of roughly half a billion
pounds27
. This is approximately equal to the same Departments underspendon its current budget in that year alone28 and compares unfavourably with the
estimate that there is a backlog of maintenance due in the NHS of over 3
billion.29 The Department of Health also suggests that PFI investment will
increase, from 632 million to 832 million per year over the next three
years30. The NHS Plan31 details the government's goal of establishing 7billion-
worth of hospitals funded through PFI by 2010.
25 Institute for Public Policy Research, Building Better Partnerships: The final Report of the
Commission on Public Private Partnerships, 2001, page 81-82.26 Institute for Fiscal Studies, Green Budget 2002, 30th January 2002, Table 3.5, page 46
27 Department of Health, Departmental Investment Strategy, p. 10,www.doh.gov.uk/dis/dis2000.pdf.
28 Institute for Fiscal Studies, Green Budget 2002, 30th January 2002, Table 2.1, page 1629 Department of Health, Departmental Investment Strategy, page 28.30 Ibid., page 23.31 NHS Plan Department of Health 2000.
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PFI is a form of borrowing, not funding, that shifts the burden onto future
generations. As the IPPR acknowledges32, the public sector repays the full cost
of the private sector providing the infrastructure and services in annual
payments over periods of 20 to 30 years. It does not access new forms or
higher levels of funding than would otherwise be the case with public funding.
Indeed, the cost of borrowing for PFI projects is estimated to be 1-2% higher
than the cost of government borrowing for direct public investment. As a result,
the government could increase investment, at no extra cost, if this were all to be
financed by direct exchequer borrowing rather than through PFI.
Far from levering in additional finances, PFI will either reduce the level of
investment achieved or increase the costs for future generations (unless private
sector efficiency can more than compensate for the additional financing costs
associated with PFI).
In addition, most PFI schemes do not now even reduce the government's official
level of borrowing, the Public Sector Net Debt. PFI schemes for roads and
prisons are included within this figure. Since Alan Milburn become the
Secretary of State for Health, in June last year, the capital value of PFI deals
within the Health Service has also been included in the official figures of
government debt.
As shown above, public sector capital investment in the UK is at a low level
compared with historic figures over the last 25 years, those for the last five
years of the previous Conservative administration and is also the lowest of any
G7 country. Government borrowing is significantly below both the Chancellor of
the Exchequer's own ceiling and that set by the European Union. For these
reasons, the argument that PFI is necessary to access much needed additional
finance for investment in public services cannot be sustained.
32 Institute for Public Policy Research, Building Better Partnerships: The final Report of the
Commission on Public Private Partnerships, 2001.
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SECTION FOUR:
PFI and risk
Risk is at the heart of all PFI and other public private partnerships, but not
perhaps in the manner claimed by their supporters. It is only by adding the
value of risk that is claimed to be transferred to the private sector that any PFI
project can appear to demonstrate value for money. In reality, the main risks in
the provision of any essential public service will remain with the government. It
cannot afford to let these services fail and so, if necessary, the private sector
provider will be bailed out by the tax-payer. Far from the private sector
managing risks more effectively time and again private sector failures have
demonstrated that the key risks remain with the public sector.
The traditional method for any organisation or individual to avoid risk is through
insurance. We pay an insurance company to take over the responsibility for our
risk of having a car accident or our house burning down. However, most people
will only voluntarily insure against significant risks that they would find difficult
to fund in any other way. The costs of administration (and the profits of the
insurance companies) mean that organisations will usually only insure against
hazards and other risks whose consequences, should they actually occur, would
be difficult to finance.
For this reason, the government, being a large wealthy organisation has a policy
of not insuring its property. If any one government building was, for example,
to burn down, if may cost a few millions pounds to re-build. But, given the size
of the government's annual budget this would be easily absorbed.
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Thus, for example, the fire at the Yarl's Wood detention centre last year was
estimated to have caused damage to the tune of 43 million. This sounds a lot
of money, but compared to, for example, the increase in the Home Office's
budget announced for 2002-03 of 2,900 million the fire would not really
make much difference to the finances of this department.
Thus the advice from HM Treasury33 is that
"As a general rule the government does not purchase commercial
insurance for the risks it faces".
The modern general approach to the risks faced by all organisations is to adopt
an explicit approach and to positively managing these risks. But in Central
Government, at least, this is a relatively new development. So, for example, the
first formal HM Treasury guidance on risk management was issued inSeptember 2000 as the Orange Book34. This followed the NAO report,
Supporting Innovation: managing risk in government departments35 which
concluded that:
"The Modernising Government programme seeks to encourage
departments to adopt well managed risk taking where it is likely to lead
to sustainable improvements in service delivery. In pursuit of this the
Cabinet Office and the Treasury are acting with departments to promote
better risk management across government, including the requirement
for all departments to produce by September 2000 frameworks setting
out their approach to risk management in their areas of responsibility."
Thus it would appear that the issue of risk transfer should be seen as a method
for justifying a PFI project rather than as a reason for developing such an
approach. It is only in the circumstances of a PFI project that risk transfer is
assumed to be an advantage.
33Government Accounting, HM Treasury 2002
34Management of Risk - a strategic overview (The Orange Book), HM Treasury, September200035Supporting Innovation: managing risk in government departments, National Audit Office,
July 2000
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The value for money test only comes out in favour of PFI after a price has been
placed on the value of risk that is assumed will be transferred to the private
sector contractor. A study in the British Medical Journal36 showed that for
eleven hospitals the PFI was only better value for money than the public sector
comparator after risk was transferred. Even then the difference was very small,
only 0.05% at Swindon & Marlborough, for example. More suspiciously, thestudy demonstrates that "the value of the risk transferred is remarkably close to
the amount needed to close the gap between the public sector comparator and
the PFI".
The value of the risk that may have been transferred often appears to have been
exaggerated. Research, also published in the British Medical Journal37, showed
that NHS PFI schemes "have in most cases assumed that the public sector
projects overrun by 12.5% or more" whereas "the average increase in cost over
approved tender sums for NHS capital projects has been between 6.3% and8.4% in the 1990's". Work undertaken by consultants for the current review of
HM Treasury's Green Book admits that their estimates of cost and time overruns
for large public sector capital schemes are higher than other recent surveys.
This is because there have been improvements in recent years and because
other surveys omitted projects with unusually large overruns.
In reality many risks are not actually transferred to the private sector as a result
of the contract for PFI or other public private partnerships. For example:
Passport Office computer problems in 1999 led to queues and costsestimated at 13 million and the cost of passports being increased by a
third. The contractors contributed only 2.5 million.
Railtrack was effectively re-nationalised last year after it became insolventlast year when the government refused to provide any further funding
36Private Finance and "value for money" in NHS hospitals: A policy in search of rationale?Allyson Pollock, Jean Shaoul, Neil Vickers, BMJ Volume 324, 18 May 2002.37PFI in the NHS: is there an economic case? D Gaffney, A Pollock, D Price, J Shaoul, BMJ
Volume 319, 1999
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a recent report found that 18 of the first 31 NHS PFI schemes were in factdelayed and that, of those delayed, the average delay was 12 months
Channel Tunnel rail link PFI scheme contract let in 1996 for 1.7 billion,1998 the government provided a further 4 billion of funding
National Air Traffic Control System - privatised in July 2001 and providedwith an additional 30 million in January 2002 from the Government
PPP for tube - NAO briefing found that the major risks would not betransferred to the contractors
Yarl's Wood - the contractors are claiming that the Government should beliable for the costs of re-building the centre.
PFI is a form of privatisation. Public service provision is transferred to the
private sector. This can only be justified, from a VFM point of view, if the value
of risks claimed to be transferred to the private sector partner are taken into
account. These risks are regularly exaggerated, other measures to reduce them
are only now being introduced and, in many cases, it turns out that the most
significant risks remain with the public sector.
In reality, the key risk with PFI is of public services being provided at a greater
cost by the private sector. If these projects are successful, the private sector
makes a substantial profit. If they fail, it is the public that suffers disruption to
services and the costs of private sector mismanagement.
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TECH_DOC_001 THE PRIVATE FINANCE INITIATIVE A BRIEFING.DOC
The Association of Chartered Certified Accountants
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