Written evidence submitted by Globalise
Resistance
ABOUT GLOBALISE
RESISTANCE
Globalise Resistance brings together groups and individuals
opposed to the global growth of corporate power.
EXECUTIVE SUMMARY
The many problems of Public Private Partnerships
and Private Finance Initiatives have been documented by government,
academics and activists alike.
Reports from the House of Lords Economic Affairs
Committee and the National Audit Office and the comprehensive
research of Allyson Pollock and Dexter Whitfield are testimony
to this. Globalise Resistance will not repeat these facts here
but instead call for three things.
Firstly, an alternative method of public procurement
needs to be established. Below we point to some alternative models
in use in other countries and invite the Treasury Committee to
examine them in detail.
Secondly, we believe the public debt incurred under
PPP/PFI should be independently audited. Forensic analysis of
the accounting practices, tendering of contracts and public consultation
of the project should be conducted and, if specific consortia
or companies are found to have worked outside of the we believe
that the public's debt to these companies should be chalked off
as odious debt.
Thirdly, if PFI is to continue there are some areas
that are clearly in need of reform. Again, we highlight these
and invite the committee to scrutinise them further.
ALTERNATIVES TO
PFI
1. Following its investigation into PFI housing
and hospital projects, The NAO recently remarked: "There
were instances where PFI may have been used where there was no
evidence that it was the best procurement route. Local authorities
and health trusts used PFI because there was no realistic alternative,
not because it represented best value for money."[84]
2. It is our view that the government should
now investigate alternative methods of public procurement. One
possible solution would be the creation of a national infrastructure
investment bank. This could direct capital to areas where markets
are less willing to provide it and, by pulling disparate departments
together, create economies of scale and leveraging power for the
government.
3. The idea has been proposed by various parties,
including Vince Cable in 2009, who recognised that the PFI model's
dependence on bank finance was a problem. In a national infrastructure
bank model, "There are various financing structures that
can be envisaged involving different combinations of private and
public equity and loan (or bond) finance and different governance
structures."[85]
4. The Institute of Civil Engineers authored
a report in December 2009 calling for a national infrastructure
bank. Among the benefits it would bring it cited the bank's ability
to "Provid[e] capital or guarantees where private financial
markets are unwilling or unable to provide all the funds required
for projects which have high social, environmental and economic
benefits."[86]
5. In Europe, such a model exists. For instance,
in Germany, the state-development bank KfW provides capital effectively
to public infrastructure projects. According to World Bank Logistics
Performance Index, Germany has an infrastructure rating of 4.34[87]
(on a scale of 1-low and 5-high). The UK stands at 3.95 while
Germany's rating is also higher than Norway, Sweden, France, Canada
& the US. Many factors, of course, contribute to strong infrastructure
but it may be that the UK could learn something from Germany.
6. Alternatively, the Treasury could evaluate
the merits and pitfalls of the SNP's Scottish Futures Trust programme,
established as an alternative to PFI. In 2010, the party claimed
to have delivered £114 million in public procurement savings
to the taxpayer. These figures were audited by the London School
of Economics and the accountants Grant Thornton.[88]
7. Neither of these models may be suitable for
Britain. However, it remains imperative to establish an alternative
to PFI and we would encourage the Treasury Committee to investigate
further options.
PFI AUDIT
8. If PFI continues to be used as a public procurement
tool we believe, to get the best out of it, the public debt incurred
under PFI must be audited and the scheme itself must be reformed.
9. The NAO's investigation into PFI Housing and
Hospitals concluded: "The Departments do not routinely collate
sufficient accurate data on the costs and performance of their
PFI contracts."[89]
10. We would like to see government go a step
further than collating data and instead establish a commission
to audit Britain's total liabilities for privately financed public
sector procurement. If the audit commission finds that players
in the PFI game repeatedly broke rules or exploited the system
we would request them to consider writing off the debts incurred
with their involvement as odious, as defined below:
"Odious debt […] holds that debt should
not be transferable to successor regimes if (a) it was incurred
without the consent of the people and (b) was not for their benefit"[90]
(Alexander N. Sack, 1927; Ernst Feilchenfeld, 1931)."
The terms of such an investigation would need to be defined meticulously.
At present this is merely suggestion and something we ask the
committee to consider.
11. A parallel output of this investigation,
in line with the NAO's comments, would be the creation of a central
data store that holds information on all previous signed PFI projects.
This will improve decision making in government as the information
will allow departments to negotiate fair prices and systematically
discern which types of PFI projects are susceptible to delays,
overspends and other failures and which projects are not.
REFORMING THE
PFI
12. Ideas for reform will come as a result of
an audit but there are already some areas that are in evident
need of address.
13. Transparency: the routine publication of
the vital statistics of PFI projects will ensure that public scrutiny
enforces efficiency and best practice from government and consortia.
Currently, some details are available under the Freedom of Information
Act but other important information is exempt for reasons such
as commercial sensitivity. An information package for each PFI
contract should be published before it is signed that includes
details of the projects.
14. Accounting: The practice of off balance sheet
accounting has been condemned by the House of Lords Economic Affairs
Committee for obscuring the real cost of PPP/PFI programmes. The
Treasury's solution of keeping two sets of books has also been
condemned.
— capital
value and projected cost;
— areas
and amount of risk transferred to the private sector;
— portion
of project's finance underwritten by government;
— contract
between consortium and government; and
— individual
companies obligations and remunerations within the contract.
It seems self evident that in the context of a national
debt crisis, the full cost of any PPP/PFI programme should be
made abundantly clear. A standardised accounting practice that
puts all debt on-balance sheet, regardless of risk transfer, should
be mandatory. If this cannot be achieved we endorse the Economic
Affairs Committee's recommendation, "that the Government
should publish figures for total liabilities for privately- financed
public sector procurement as a separate item alongside figures
for Public Sector Net Debt."[91]
15. The transfer of risk: currently, the percentage
of risk transferred is left to departments and consortia to determine.
We believe that 100% of construction risk should be transferred
to the private sector on a mandatory basis. In some PFI projects,
such as the failed MetroNet[92]
there have also cases of government underwriting privately sourced
debt. This is fundamentally counter-productive and should be outlawed.
16. NDPBs: the role of Non Departmental Public
Bodies in PFIs should be examined. Having submitted a FoI request
to Defra recently, I was told that the department held no contractual
information on PFI because all the contracts had been tendered
by non-departmental public bodies (NDPBs). According to Treasury
figures, Defra is one of the biggest PFI spenders, with £422
million due for the year 2011-12.[93]
No report so far seems to have addressed the role of NDPBs and
an investigation into their funding, performance and methods of
working would be welcome too.
17. Secondary markets: many PFI consortia sell
their contracts in secondary markets after the initial construction
phase is complete. Yet this violates one of the key principles
of PFI; the idea of "whole-life costing",[94]
that is, that the consortium is responsible for the construction
and maintenance of the project for a length of time and therefore
has the incentive to build a higher quality structure.
May 2011
REFERENCES
Institute of Civil Engineers (2009)A National Infrastructure
Investment Bank: An ICE briefing and discussion paper by
House of Lords Economic Affairs Committee (2010)Private
Finance Projects and off- balance sheet debt.
House of Commons Committee of Public Accounts (2011)
PFI in Housing and Hospitals.
Treasury Spending Data (2011) UK Private Finance
Initiative Projects: Summary Data.
World Bank Logistics Performance Index: Infrastructure
by country
http://info.worldbank.org/etools/tradesurvey/mode1b.asp?sorder=q11rank&cgroup=i4
Vince Cable speech to Civilisation Congress (2009)
http://www.nickclegg.com/speeches_detail.aspx?title=Vince_Cable_launches_proposals_for_a_National_Infrastructure_Bank&pPK=441f7ef6-5e78-44b4-888b-c7115c191479
Edinburgh Southern SNP : "PPP/PFI Rip off for
Edinburgh"
http://www.edinburghsouthernsnp.org/index.php?option=com_content&view=article&id=9&Itemid=8
84 House of Commons Committee of Public Accounts (2011)
PFI in Housing and Hospitals-page 3. Back
85
Vince Cable speech to Civilisation Congress (2009)
http://www.nickclegg.com/speeches_detail.aspx?title=Vince_Cable_launches_proposals_for_a_National_Infrastructure_Bank&pPK=441f7ef6-5e78-44b4-888b-c7115c191479 Back
86
Institute of Civil Engineers (2009) A National Infrastructure
Investment Bank: An ICE briefing and discussion paper page 4. Back
87
World Bank Logistics Performance Index: Infrastructure by country
http://info.worldbank.org/etools/tradesurvey/mode1b.asp?sorder=q11rank&cgroup=i4 Back
88
Edinburgh Southern SNP : "PPP/PFI Rip off for Edinburgh"
http://www.edinburghsouthernsnp.org/index.php?option=com_content&view=article&id=9&Itemid=8 Back
89
House of Commons Committee of Public Accounts (2011) PFI in Housing
and Hospitals-page 5. Back
90
Seema Jayachandran and Michael Kremer (2006) "Odious Debt"
in American Economic Review-pages 82-92. Back
91
House of Lords Economic Affairs Committee (2010)Private Finance
Projects and off- balance sheet debt-page 34. Back
92
House of Lords Economic Affairs Committee (2010)Private Finance
Projects and off- balance sheet debt-pages 22-24. Back
93
Treasury Spending Data (2011) UK Private Finance Initiative Projects:
Summary Data. Back
94
House of Lords Economic Affairs Committee (2010) Private Finance
Projects and off-balance sheet debt-page 25. Back
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