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| Labour is right to rule out PFI rip-offs in future, but it should leave the past alone | Labour is right to rule out PFI rip-offs in future, but it should leave the past alone |
| (4 months later) | |
| Tue 26 Sep 2017 17.48 BST | |
| Last modified on Mon 27 Nov 2017 16.23 GMT | |
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| With John McDonnell promising to scrap billions of pounds worth of private finance initiative deals, let’s look at their chequered past. | With John McDonnell promising to scrap billions of pounds worth of private finance initiative deals, let’s look at their chequered past. |
| We often credit (or blame) John Major with coming up with the idea of using PFI to fund new hospitals, schools, roads and defence equipment in the 1990s. However, Labour local authorities employed similar devices in the 1980s, when Ken Livingstone and McDonnell were leading the Greater London Council and I was leader in Islington. The Thatcher government had cut local authority budgets and introduced rate-capping, and we responded by raising private finance to keep our housing capital programmes going, in a series of complicated deals that were then described as “creative accounting”. We borrowed money against our assets, only paid out interest on the loans in the short term, and left it to future generations to pay the debt back over time. | We often credit (or blame) John Major with coming up with the idea of using PFI to fund new hospitals, schools, roads and defence equipment in the 1990s. However, Labour local authorities employed similar devices in the 1980s, when Ken Livingstone and McDonnell were leading the Greater London Council and I was leader in Islington. The Thatcher government had cut local authority budgets and introduced rate-capping, and we responded by raising private finance to keep our housing capital programmes going, in a series of complicated deals that were then described as “creative accounting”. We borrowed money against our assets, only paid out interest on the loans in the short term, and left it to future generations to pay the debt back over time. |
| But what started as a mechanism to respond to real constraints to investment quickly morphed into the only show in town for public investment. Decision-makers stopped using traditional ways of funding capital projects and PFI became the most common route for public bodies. Along with everybody else, I celebrated the building of a new PFI hospital for my constituents, the new school buildings in Barking and Dagenham, and the improvements to the A13 through my constituency. I thought these were important developments that would not have happened without PFI. | But what started as a mechanism to respond to real constraints to investment quickly morphed into the only show in town for public investment. Decision-makers stopped using traditional ways of funding capital projects and PFI became the most common route for public bodies. Along with everybody else, I celebrated the building of a new PFI hospital for my constituents, the new school buildings in Barking and Dagenham, and the improvements to the A13 through my constituency. I thought these were important developments that would not have happened without PFI. |
| But my time on the public accounts committee (PAC) between 2010 and 2015 convinced me that we had got it wrong. PFI, I said at the time, was a total scandal; we had been seduced by the concept and ripped off by PFI contractors. Although similar misgivings have been expressed by Conservative politicians, this government continues to sponsor new PFI schemes. For instance, the NHS wants therapists, pharmacists and others to work out of doctors’ surgeries, but that requires £10bn capital investment in GP surgeries – and PFI is seen as the only way to achieve that investment. Worse still, the NHS is actively promoting the use of PFI-funded hospital schemes in developing countries such as Colombia and Peru.Using PFI costs the taxpayer more than if the public sector financed investment directly. Interest rates are over 2% higher, and that extra cost falls on taxpayers. The extra cost was justified on the grounds that the private expenditure didn’t count against public expenditure totals. But the ONS changed the rules and all PFI expenditure is now included in the public expenditure totals, so that justification no longer holds good. | But my time on the public accounts committee (PAC) between 2010 and 2015 convinced me that we had got it wrong. PFI, I said at the time, was a total scandal; we had been seduced by the concept and ripped off by PFI contractors. Although similar misgivings have been expressed by Conservative politicians, this government continues to sponsor new PFI schemes. For instance, the NHS wants therapists, pharmacists and others to work out of doctors’ surgeries, but that requires £10bn capital investment in GP surgeries – and PFI is seen as the only way to achieve that investment. Worse still, the NHS is actively promoting the use of PFI-funded hospital schemes in developing countries such as Colombia and Peru.Using PFI costs the taxpayer more than if the public sector financed investment directly. Interest rates are over 2% higher, and that extra cost falls on taxpayers. The extra cost was justified on the grounds that the private expenditure didn’t count against public expenditure totals. But the ONS changed the rules and all PFI expenditure is now included in the public expenditure totals, so that justification no longer holds good. |
| Paying the PFI charges is the first call on a public body’s budget. PFI costs have to be met before a single nurse, doctor or teacher is employed. So as budgets have tightened, hospitals have been forced to close beds and cut staff first and have not been able to cut the costs of their buildings. Even when a PFI facility is closed, the charges still have to be met. So Liverpool city council is still paying the £58.9m PFI bills on Parklands high school, which closed in 2014. | Paying the PFI charges is the first call on a public body’s budget. PFI costs have to be met before a single nurse, doctor or teacher is employed. So as budgets have tightened, hospitals have been forced to close beds and cut staff first and have not been able to cut the costs of their buildings. Even when a PFI facility is closed, the charges still have to be met. So Liverpool city council is still paying the £58.9m PFI bills on Parklands high school, which closed in 2014. |
| Furthermore, the public sector is notoriously bad at both writing and managing the contracts it enters into. That’s why we end up with ridiculous charges to make little changes to contracts: the £900 the Treasury had to pay to get its PFI contractor to put up a Christmas tree; the £8,154 charged to fit one blind in a school in Bristol; and the £48 charged to a school in Oldham to get security staff to open the gate and allow children in to use the toilets. These are just some of the absurdities I have come across. | Furthermore, the public sector is notoriously bad at both writing and managing the contracts it enters into. That’s why we end up with ridiculous charges to make little changes to contracts: the £900 the Treasury had to pay to get its PFI contractor to put up a Christmas tree; the £8,154 charged to fit one blind in a school in Bristol; and the £48 charged to a school in Oldham to get security staff to open the gate and allow children in to use the toilets. These are just some of the absurdities I have come across. |
| Promises that cannot be realised will not help to build confidence in Labour’s ability to manage the economy | Promises that cannot be realised will not help to build confidence in Labour’s ability to manage the economy |
| But it’s the excessive profits made at taxpayers’ expense that really undermine any justification for future PFI contracts. When financing deals are renegotiated by PFI contractors to secure lower interest charges, little of the benefit is passed on to the taxpayer. PFI companies are sold and sold again, always at a profit. A study of 63 transactions involving 154 PFI projects that changed hands between 2003 and 2009 found that the total value of the sales was over £1bn and the profit to the companies a colossal £500m. Worse still, most of these PFI companies are based in tax havens, and so that they avoid UK tax. The Norfolk and Norwich Union hospital is owned by a company based in Jersey, while the owners of the Home Office’s headquarters are in Guernsey. | But it’s the excessive profits made at taxpayers’ expense that really undermine any justification for future PFI contracts. When financing deals are renegotiated by PFI contractors to secure lower interest charges, little of the benefit is passed on to the taxpayer. PFI companies are sold and sold again, always at a profit. A study of 63 transactions involving 154 PFI projects that changed hands between 2003 and 2009 found that the total value of the sales was over £1bn and the profit to the companies a colossal £500m. Worse still, most of these PFI companies are based in tax havens, and so that they avoid UK tax. The Norfolk and Norwich Union hospital is owned by a company based in Jersey, while the owners of the Home Office’s headquarters are in Guernsey. |
| McDonnell’s promise that a Labour government would not sign another PFI contract is welcome. But Labour needs to be careful about further promises to “bring back” existing contracts. That is highly unlikely to save any money, as we will face a huge bill in terminating them. And of course, much of the funding for PFI deals comes from all our pension funds. | McDonnell’s promise that a Labour government would not sign another PFI contract is welcome. But Labour needs to be careful about further promises to “bring back” existing contracts. That is highly unlikely to save any money, as we will face a huge bill in terminating them. And of course, much of the funding for PFI deals comes from all our pension funds. |
| Smoke and mirrors with promises that cannot be realised will not help to build confidence in Labour’s ability to manage the economy. It may make good politics in the conference hall, but it doesn’t build trust among the voters Labour needs to win. And for me, the priorities for a future Labour government should be investing in early years, health, social care and schools, not spending our precious resources undoing past actions for purely ideological reasons. So let’s not dwell on the past but focus on a future free of rip-off PFI deals. | Smoke and mirrors with promises that cannot be realised will not help to build confidence in Labour’s ability to manage the economy. It may make good politics in the conference hall, but it doesn’t build trust among the voters Labour needs to win. And for me, the priorities for a future Labour government should be investing in early years, health, social care and schools, not spending our precious resources undoing past actions for purely ideological reasons. So let’s not dwell on the past but focus on a future free of rip-off PFI deals. |
| • Margaret Hodge MP chaired the public accounts committee from 2010 to 2015 | • Margaret Hodge MP chaired the public accounts committee from 2010 to 2015 |
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