Written evidence submitted by J P Heawood
ABOUT MYSELF
I am a resident of York who was alarmed by early
reports of PFI, doubly so when it came to the local primary school
which our children had attended. With others I formed York PFI
Watch (now defunct) to inform teachers, parents and others, by
a website, leaflets, press letters and attendance at meetings,
about the operation of PFI and its implications. My reading since
then suggests that the fundamentals of PFI are unchanged, and
I wish to make a criticism of it which I think is not sufficiently
recognised.
EXECUTIVE SUMMARY
OF SUBMISSION
(1) PFI as operated is dishonest, because it
forces bodies applying for PFI funding - to which there is usually
no alternative—to present private finance as cheaper than
public funding, whether it is or not.
(2) In practice, as has happened in York, an
initial case showing public funding as cheaper than private is
tilted the other way by a figure for transferred risk.
(3) In fact no risk is transferred unless specified
in the contract, and there are reasons to think that in reality
much risk remains with public bodies.
(4) Secrecy makes PFI undemocratic; its operation
is dishonest, corrupting and coercive, perpetuating in every submission
the myth that "private" funding is always cheaper than
public, despite contrary evidence, and thereby wasting resources.
(5) The inquiry should make public the detailed
operation of PFI, and make genuine comparisons of private and
public funding; it should recommend the abolition of all public
spending disguised as private, and of all funding tests requiring
"evidence" that is a foregone conclusion; and it should
recommend elimination by all means of excessive costs in existing
PFI contracts.
1. INTRODUCTION
PFI has many faults, but I will limit myself to a
crucial criticism which is seldom aired. This concerns the dishonesty
of PFI, and the expensive falsehood that maintains it. PFI was
brought in to disguise certain public spending as private finance.
To justify this, it was deemed necessary to present "private"
funding as cheaper than undisguised public spending—most
improbably, as governments borrow at preferential rates and do
not have to create a profit. Councils and other authorities have
been forced by this into a culture of dishonesty, for which their
"reward" is decades of serious over-expenditure.
2. THE YORK
SCHOOLS EXAMPLE
A local and typical example is the fairly recent
rebuilding of three primary schools in York: Hob Moor, Westfield;
St Barnabas', Beckfield; and St Oswald's, Fulford. To get new
schools, the City of York Council had to apply for private finance,
"the only show in town". To secure this, York's business
case had to show the PFI cost as being lower than undisguised
public funding—whether it was or not.
In the York Schools PFI Project, the executive summary
of the Outline Business Case (OBC) gave the PFI cost as £11.1
million, with the projected Public Sector Comparator (PSC) better
value at £10.3 million. But of course a bid with those figures
wouldn't get public funding—it would get no funding!
So, as was customary, an "estimated risk"
figure of £1.4 million was added to the PSC, which made PFI
look better value; York's bid was then accepted, in March 2002,
and the schools were built. This estimated risk figure, which
made York's PFI bid viable, was held to represent risk that would
be transferred to the "private provider", Sewell Group,
if it built the schools. It was impossible to test this figure,
as the OBC was not made public.
3. THE CLAIM
OF RISK
TRANSFERRED
The council's claim, as conveyed to the public by
York Schools Project Manager Damon Copperthwaite in a newspaper
interview (Yorkshire Evening Press 24 March 2004) was that
"by entering into a PFI agreement the provider takes on all
the risk". This was quite untrue, for several reasons (taken
from an indispensable pamphlet, Rowland & Pollock "Understanding
the Private Finance Initiative", Unison, 2002):
(1) No risks are transferred to the provider
unless specified in the contract, with enforceable financial sanctions.
(2) Nor do risks always stay transferred. Companies
failing to deliver have regularly used this as a reason to renegotiate
their PFI contract—upwards!
(3) If Sewell go bankrupt or withdraw, York carries
the can, since PFI contracts are technically speaking not with
the PFI company but with a "Special Purpose Vehicle"
for which that company is not financially responsible.
(4) PFI creates new risks: under a PFI contract,
the PFI repayments are "protected", with priority in
school budgets over all other spending—even teachers' pay.
(5) If for any reason PFI costs rise during the
following 25 years, the government will not increase its contribution:
any increase will fall in full on the council.
I made points (1)-(3), worded as shown, in a reply
to Mr Copperthwaite which the paper printed, inviting him to correct
me if my information was wrong or outdated. He did not do so.
This destroyed all faith in the council's claim about £1.4
mILLION of transferred risk—which remained the only "evidence"
that PFI was cheaper than public spending!
4. SUMMARY OF
CRITICISM
(1) PFI is undemocratic: the break-down
of York's expenditure is a commercial secret from York's taxpayers,
who will pay for it over 25 years, but can't hold their councillors
accountable for the costs, because they don't know in detail what
the costs are.
(2) PFI is dishonest: the alleged comparison
between "private" and public funding is not obtained
honestly; since the PFI "option" is the only one, the
council's task is not to find out whether, but to ensure that,
the PFI figure appears as better value.
(3) PFI corrupts: there is pressure on
officers to make the figures come out right, ie in favour of PFI;
they may well feel their professional integrity threatened or
tarnished.
(4) PFI coerces: councillors are coerced
into voting for policies they may completely disagree with; in
York in 2001, 24 Liberal Democrat councillors, whose party's policy
was opposed to PFI, had to vote for it for fear of losing three
new schools for York.
(5) PFI perpetuates falsehood: every PFI
scheme submitted (many more are submitted than succeed) adds perforce
to the accumulated mass of improbable "evidence" that
PFI is cheaper than public spending.
(6) PFI wastes resources: as the "proof"
that PFI is cheaper is a charade, it is no surprise that true
figures show councils loaded for decades with grossly excessive
repayments, corresponding to enormous profits made by some (not
all) PFI providers.
5. RECOMMENDATIONS
I suggest that this Inquiry should:
(1) make public the detailed operation of PFI,
so that its fundamental dishonesty, and the culture of corruption
and falsehood it has created, are evident to everyone;
(2) make unbiassed comparisons, for a representative
sample of PFI projects, between the overall costs of PFI and the
corresponding costs of straightforward public spending;
(3) invite evidence regarding (1) and (2) above,
first and foremost from Prof Alyson Pollock, academic, and also
from Ms Polly Toynbee, journalist, both of whom have produced
full and convincing evidence for the criticism of PFI presented
here;
(4) recommend the abolition, if necessary by
statute, of attempts to represent public spending as private financing;
(5) recommend the abolition, if necessary by
statute, of government funding tests that require submission as
"evidence" of what is in fact a foregone conclusion;
and
(6) recommend urgently the reduction of expenditure
on existing PFI contracts, whether by renegotiation, taxation
or legislation, so that profits from these schemes no longer impose
an excessive and unreasonable burden on local or national taxpayers.
April 2011
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