Gordon Campbell on private sector delivery as an inter-generational scam

Public private partnerships (PPPs) are still being envisaged by the Key government’s as its favoured method for financing new schools, motorways etc, but the experience in Britain with such schemes continues to be really disturbing. Over there, they call them PFIs ( or public finance initiatives) and the Guardian newspaper has just published some pretty compelling evidence that PFIs offer poor value for money, and will saddle subsequent generations with a mountain of debt:

The 717 PFI contracts currently under way across the UK are funding new schools, hospitals and other public facilities with a total capital value of £54.7bn, but the overall ultimate cost will reach £301bn by the time they have been paid off over the coming decades.

Much of this difference is due to ongoing running costs built into the contracts, but the schemes have also been criticised for providing poor value for money compared with the interest rates the government would pay if it borrowed money directly to pay for the schemes.

In other words, they would cost less over time, if government had simply borrowed the money and built the facilities itself, and left fewer opportunities for others to clip the ticket en route. The debt financing impact of PFIs is already taking down some of the organisations involved, leaving government with no option but to step in, re-assume control and pick up the liability:

Last week, South London Healthcare Trust, which runs three hospitals in south-east London, was placed in administration by the health secretary as it struggled to meet the cost of its PFI obligations.

Moreover, while our Treasury and local lobbyists urge the government to embark on more PPPs here – largely on the basis of faith-based reasoning about the alleged superiority of private sector management and delivery – the British Treasury is trying to find a way of extricating the coalition government from the PFI mess. One reason is that some PFI projects are ending up costing 12 times the original sum, over the course of the 30 year contract:

The [British] Treasury said on Thursday that it expected to make an announcement soon following a “fundamental review” of PFI and a search for alternatives, initiated by ministers late last year amid concern that too many of the deals represent poor value for money. Ministers recognised the concern felt about PFI and had already acted to make savings, added a spokeswoman.

The Treasury said that future liabilities under PFI total about £242bn (once existing payments are taken into account) and that this figure would shrink to £122bn if it were adjusted for future expected inflation. Nonetheless, details of the contracts compiled by the Treasury make clear that some NHS organisations will end up paying almost 12 times the initial sum over what is usually a 30-year contract.

For example, while the capital cost of rebuilding Calderdale Royal Hospital in Yorkshire is £64.6m, the scheme will end up costing Calderdale and Huddersfield NHS Foundation Trust a total of £773.2m. Similarly, the cost of building the new Wallsgrave district general hospital in Coventry will jump from an initial £379m to an eventual £4bn.

PPPs are, in other words, an inter-generational scam. And does anyone really think that our Treasury – which can barely put together an annual economic forecast that’s still valid a fortnight later – would be willing or able to negotiate PPP contracts in a way that protects New Zealand taxpayers from massive debt liabilities downstream, any more successfully than their British counterparts have done? Hardly. Our Treasury would be more likely to see virtue in capitulation.

Learning on the Job

Talking about the alleged superiority of private sector delivery, the concept of private prisons has got off to a less than rousing start, hasn’t it?

Private prison operator Serco has been told it needs to “lift its game” after failing nearly half of its targets in its first nine months in charge of Mt Eden prison. A Corrections Department report on Serco’s management of the Mt Eden Corrections Facility showed it had allowed a prisoner to escape in its first months in charge, had wrongfully released and detained inmates, and had not kept serious assaults under control.

Serco had failed to meet 15 out of 37 targets set by the department.

Right. We can imagine the hue and cry – and the calls to bring in the private sector – that we would be hearing if those dismal outcomes were being clocked up by the state. Remember what Finance Minister Bill English said only a few months ago about the same firm that runs Mt Eden – Serco – after they won the $900 million, 25 year PPP contract for the new prison at Wiri that’s due to open in 2015?

Finance Minister Bill English said he was confident that the prison would cost 10 per cent less than a public prison, and perform better than the public sector… “We are confident the new prison will reduce re-offending, improve public safety and help improve performance across the entire prison system.

“The contract will have strong performance incentives, ensuring we receive a superior service compared to publicly run prisons or we pay a lower price.”

Ah-huh. We’ll believe that when we see it. Only a few weeks ago, the New Yorker magazine chose to examine what it called the “free market shibboleth” that private sector delivery is innately superior. On education:

A 2011 study from the National Bureau of Economic Research found that students who attended for-profit colleges had more of a debt burden, were more likely to default on their loans, and were less likely to be employed than students who’d gone to nonprofit institutions…

In 2012, California enacted a new law excluding colleges from a state financial aid program if their student-loan default rate over three years was more than 24.6%. “Of the state’s 167 for-profit schools, 67 failed the test…None of California’s public schools failed.”

And on privately run prisons:

Private prisons save money by paying employees less and training them for shorter periods; as a result, turnover is high, assaults more frequent, and safety records generally poorer than in government-run prisons.

And yet what are the two areas where the Key government is forging ahead with private sector delivery? Schools and prisons.