R.I.P. Time For PPPs

Britain sends a message to its former colony

by Gordon Campbell

As we patiently await republican status for New Zealand, the Mother Country can still offer a few cautionary gems of advice. Only a couple of weeks ago, Auckland Chamber of Commerce CEO Michael Barnett was publicly wondering why on earth Mayor Len Brown hasn’t put public private partnerships on the short list of ways to fund Auckland’s transport projects, which could run to $10 billion for big ticket items such as the inner-city rail loop and a third harbour crossing. Regional fuel taxes, road tolls and parking levies were still live options… but not PPPs, apparently. Barnett professed himself mystified. Reportedly, he couldn’t understand why the PPP idea had been dropped.

In Britain, the answer would be a little more obvious, since PPPs are no longer flavour of the month. Why? Because there have been too many examples of central and local government being suckered into public finance deals that have ended up saddling them with such unacceptable levels of debt and poor private sector performance that the state has been left with no option but to step in, pay out the contracts and do the job itself – which in the end, it would have been cheaper for it to do from the outset.

You want cautionary examples of PPPs gone sour? This failed IT joint venture between IBM and a range of local councils in Somerset is a useful starting point. The verdict delivered in February by Somerset County Council chief Ken Maddock went like this:

“It is failing to deliver promised savings; failing to cope with a changing financial landscape; failing to be flexible enough to adapt in challenging times and provide the best possible value for money.” The Southwest One “continuing failure” was not about staff, Maddock said, but “about the contract, the complications, the failed technology, the missed opportunities, the lack of promised savings”.

Or what about this failed PPP project in the education sector in Cornwall? This had begun with the same rosy expectations about the ease of funding access and private sector delivery envisaged by Michael Barnett:

In 2001, Cornwall County Council signed a 25-year, £74m deal with a consortium called NewSchools Cornwall to refurbish and maintain the schools. It was funded by the government’s Private Finance Initiative (PFI), which is a way of getting the private sector to invest in public projects. Instead of Cornwall Council having to raise the funds for the work on the money markets, NewSchools Cornwall would secure the financing instead and do the job in return for regular payments from the council.

Unfortunately, here’s how it has ended up:

Cornwall Council is having to spend millions of pounds patching up schools after the collapse of [the] contract. [An] investigation by BBC Inside Out has revealed some are now in a worse state of repair than before… A total of 28 schools are affected and the council has estimated the bill to put things right will be about £10m… At the start, classrooms were added and refurbished, but ongoing maintenance problems began to surface, with head teachers saying work was either done late, shoddily or not at all.

Charles Boney, chair of governors at Trewidland Primary School, near Liskeard, said the management problems had been a big distraction. “We don’t become governors in order to become crisis managers but that’s what’s happened,” he said.

Across Britain, there is a growing disenchantment with the model. It was always suspect. Great disasters in the past have included Gordon Brown’s catastrophic London tube public-private partnership. The privatisations of water and the National Grid may well have made fat profits for monopoly providers – which may have impressed Barnett – and that was money that could have been used for reservoirs, leaks and building modern water and electricity grids. However, the concerns now run far deeper. As the Guardian recently reported, even the British Treasury now seems to have had enough of PPPs, which are called PFIs ( Public Finance Initiatives) in Britain:

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.

The Guardian had totted up the cost/benefits of PPP/PFI model across Britain and concluded that the model delivers poor value for money, while saddling 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, the schemes would have cost less over time, if government had simply borrowed the money and built the facilities itself, and left fewer opportunities for corporates to clip the ticket en route. Already, the debt financing impact of PFIs is taking down some of the organisations that have experimented with them, 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.

Sooo… a narrow escape for the people of Auckland thus far. While our Treasury and business lobbyists such as Michael Barnett are still urging the government to embark on more PPPs here – largely on the basis of yesteryear’s faith-based reasoning about the alleged superiority of private sector management and delivery – it is worth keeping in mind that the British Treasury is simultaneously trying to find a way of extricating the coalition government from the PFI mess. Sometimes, it seems, the Mother Country still knows best.