Carillion’s collapse. Capita on the brink. The failure of the East Coast Rail franchise. A quarter of all additional funding allocated to schools in 2017 funnelled into profits for PFI firms. These are just four of the most recent examples of how public-private partnerships (PPP) and outsourcing are supposed to save taxpayers money but fail to deliver and routinely cost far more than anticipated. Yet, the government continues to repeat this same mistake, year after year. Why is it that the lure of PPP is so strong and how we can we step back from living amidst its many disasters?
The history and logic of PPP and PFI
The idea of funding and delivering public services through PPPs and other forms of outsourcing has its roots in the Conservative Government of the 1980s and 1990s. John Major pushed private finance initiatives (PFIs) as a way to foster PPPs through the 1990s. By the time Labour came to power in 1997, the pro-market, anti-state dogma that had come to define the Conservative agenda had firmly taken hold. New Labour bought the Conservative argument that governments lacked the ability to efficiently and effectively fund and run government services. According to this view, the private sector is always more entrepreneurial and more efficient than the public sector, offering better value for money than ‘bloated’ state bureaucracies. So, it was Gordon Brown as Chancellor and Prime Minister, who acted as a key architect of the expansion of PFI from 2007 on.
But the whole premise of this argument is flawed. The fact is that many of the PFI companies are successful only because they win favourable contracts from the state. Often, they have no real experience of the services they subsequently provide. More often than not, they simply transfer workers over from the public to the private sector. And over time, they make money by cutting wages. The ‘market’ they operate within is not a competitive market in any way that might lead to the ‘efficiencies’ markets are meant to promote. It is worse than either the public or the private sector option because it is based on contracts and practices that are neither subject to government interference nor to free-market discipline, as Colin Crouch has pointed out. Dexter Whitfield and others at the European Services Strategy provide a wealth of evidence to challenge the logic of PPPs of all descriptions.
Ultimately, when things start to go wrong, the state has to take over and burden taxpayers with the added costs. Market failure is tolerated as long as taxpayers foot the bill, but the failure of these essential services can never be an option.
PPP and PFI – a historic trail of economic destruction
Reports back in January on city academies – the pinnacle of PPPs – have exposed profiteering, underfunding, poor quality infrastructure and staffing problems. A few weeks before the collapse of Carillion came the news that outsourcing to forensic science companies was routinely resulting in a failure to meet official standards, raising risks of miscarriages of justice. 2017 saw the failure of the privatised probation service and more high-cost bailouts for train companies already benefitting from state subsidies.
It wouldn’t be so bad if we could say that the practice was young and we didn’t know any better when the experiment was begun. But the story has been the same for nearly two decades. It was as early as 2001 that a detailed report by the IPPR found that PFI hospitals failed to offer better value for money than public sector builds. In 2003, WS Atkins walked away from an agreed contract to run educational services in Southwark at an estimated cost of at least £2.2m (see K. Toolis, ‘Will They Ever Learn’, The Guardian, 22nd November 2003). That same year, the Audit Commission found that PFI schools were of lower-build quality and found no evidence they were completed more quickly (and later work has examined these issues in more detail). Then, in 2004, the government had to cough up almost £1m per year on top of the agreed contract to prevent SERCO from deserting its commitment to run educational services in Bradford. In terms of negative effects on workers, there is ample scientific evidence from the early 2000s to suggest that the expansion of PFI led to widespread redundancies and reduced benefits in work, including pay cuts. And the failures in NHS outsourcing have been well-documented by Alyson Pollock and others.
Perhaps most damning was the National Audit Office’s investigation into PFI published at the end of 2017. It found little evidence for the claim that PFI is better value for money than traditionally funded and delivered services. The cost of funding investment in this way can, the NAO found, be 40 percent higher than if it was funded solely by the government.
Evidence shows PPPs are more risky, not less
The political argument that PPPs are less risky does not hold water either. The problem with the risks associated with PPPs is that they creep up without warning and increase over time. Reducing terms and conditions of work within ‘public’ services infects other industries. When pensions are cut or underfunded, its tomorrow’s retirees and their families who bear the cost. Taxpayers may have to contribute more for their pensions, as they do for those whose wages are reduced or kept low. Those who are laid off must make claims on the benefits system. And ultimately, when contracts fail, the government is left with the bill. Meanwhile, the likelihood that the state will have to pick up the pieces of failing companies increases.
In the case of Carillion, the government will no doubt try to find other companies to which to award the contracts, but it will by necessity be at higher cost and greater risk. No company will take over what are viewed as poor-quality contracts in the absence of sweeteners, and the government will be keen to throw money at the problem to make it go away. Contracts will be sold on to other bidders with the attendant risks that services are delivered by companies that government has little opportunity to vet.
Additionally, the government is likely to have to fill the pensions black hole within Carillion. And if that wasn’t enough, the government is set to lose out on the £2.6m equity stake that it holds in the company.
The great PFI money grab
In this way, PFI has operated to divert workers’ wages and taxpayer pounds to private profits. Private companies have benefited hugely from the growth in this industry. Whilst government has continued to pretend that this delivers value for money because it is subject to market-principles, nothing could be further from the truth. What we have ended up with is neither the state nor the market, but a rigged-market that awards decades-long contracts to companies competing in relatively concentrated markets. There is no market discipline, just a string of companies operating with only one customer. What they have become experts in is winning government contracts.
But as the sorry tale of Carillion testifies, not even protected markets, with a guaranteed customer and income, is enough to maintain the company. The fact that companies cannot make it in such a world is very telling. The boss of one of Carillion’s competitors for government contractors, Capita, admitted last week that the company had become too complex and that the company lacked discipline.
Carillion has now gone. Capita, another company that has grown fat on government contracts, has seen its profits plummet and its share price has, in the wake of Carillion, fallen off a cliff.
It’s time to replace flawed logic with sound policy
Ultimately, we should not blame the outsourcing companies for the failure of PFI and the prevailing outsourcing model. Its failure was widely predicted. PFI did keep capital expenditure off the government’s books, but it replaced cheap government debt — governments can always borrow more cheaply — with more expensive private debt. If the government had financed capital investment through taxation and public debt, it would have had to pay interest on its debt. Under PFI, it has to pay much higher charges to the private sector as recent work by the National Audit Office found. Most damning is the fact that PFI converts public debt liabilities into revenue commitments. In other words, it converts managed into non-discretionary expenditure. There is no alternative but for government to maintain expenditure in key areas – a fact that becomes especially problematic when governments target expenditure cuts on a shrinking range of discretionary expenditure areas.
If the government had itself invested in infrastructure, it would now own properties and land it could further expand, reduce, utilize or sell as local needs dictate. Under PFI, there is no such flexibility, and land and other resources were signed over in order to sweeten the deals. It the worst of all worlds: inflexible arrangements that neither respond to market signals nor the demands of local citizens.
Of course, it isn’t all bad. PFI has yielded many buildings that function well and deliver decent services. But we could have had equally well-functioning buildings and services at lower overall cost and lower overall risks, not least to the next generation.
Corbyn is right. It is time to re-examine PFI. It is time to level the playing field. In many areas, this will involve bringing the state back in. But this does not go far enough. It is time to stop pretending that the private sector ever really goes it alone or that private sector ‘efficiency’ is the best option to deliver public goods. It is time to conduct a full audit of how much the private sector, as a whole, extracts from the state. It is time to recognise the public costs of private markets and to stop pretending that the private sector pays fully for the risks they confront.
As Labour and the Conservatives consider the future of PFI and government support for businesses under their industrial policies and as part of the wider state, they need to ensure that corporate welfare recipients accept the mantra that politicians have been keen to thrust onto social welfare claimants: no benefits without responsibility. That responsibility begins with paying your tax and acknowledging the important role of the state in the function of the market, but it extends to much, much more.
by Kevin Farnsworth and Nicki Lisa Cole