a)Advantages/Disadvantages
Theexpansion of PFI and PPP may be seen in the context of:
Argumentsin favour of funding capital expenditure in this way are:
Comment :
Itshould be remembered that PFI/PPP is substitutional, rather than additional,for conventional public sector capital expenditure. In the NHS for example mostPFI Hospitals are replacing old ones rather than additional to the currentresource. On 24 April 1997 the Financial Times estimated that health trusts inScotland will lose around 30% of their beds as a result of PFI. These losseswill have to be made up by hiring beds in the private sector as the Governmentmakes increased commitments to extra beds.
Comment:
Thecost of borrowing is greater in the private sector. The cost of borrowing apound of capital to fund an investment will be higher under the PFI than ifborrowed directly from the Treasury.
ThePFI Consortia will want a minimum return on their investment of at least 10%(examples of projected rate of return of 19.4 per annum (Bridgend Prison) and12.8% (Fazakerley Prison). This means that PFI projects are, at leastinitially, more costly. (Centre forPublic Services report, January 1999)
Manyof the assumed benefits of PFI would appear to be available to better managedand controlled conventional procurement. House of Commons Treasury Committee1996
b) Efficiency Savings.
It should be noted inthis context that four out of the five Health Trusts(in England) to receivered lights for poor cleaning/hygiene standards had contracted out theircleaning operations.
Thereis some argument that maintenance standards will be higher in privatelymaintained buildings because of the contractors obligations under PFIcontracts. Higher standards could, however, be maintained within the publicsector through clear standards and ringfenced money for building maintenance.
Britainalready has the cheapest health care system in the western world. The constantdrive for efficiency savings in the NHS threatens to lower standards andplace unfair pressure on staff and patients.
Assertionsabout more effective private sector management skills being made available bypartners look unconvincing when such private sector partners are seen to berecruiting senior staff and consultants with strong public sector experience.This is particularly noticeable in the Education sector.
CanPFI/PPP deliver high quality, good value, well managed services for Scotland?
Comment :
The1997 report prepared by the Joint Task force set up by the Secretary of Statefor Scotland and COSLA on Best Value inLocal Government set out four key principles of Best Value. There are questionsas to whether PFI/PPP can fulfil those principles.
Accountability
Democraticaccountability in Local Government must inevitably be undermined by privatesector provision. Accountability also requires that customers have an inputinto decision about the way services are provided. It remains to be seen howflexible a 30 year PFI contract can be but the inability to renegotiate a contractover such a long period may undermine flexibility in the face of changingservice needs.
Transparency
Thisrelates to question 7. Commercial confidentiality undermines transparencyand has been used in relation to PFI toprevent effective consultation with stakeholders (ref. Edinburgh RoyalInfirmary).
Continuous Improvement
Lengthof contract issues. How much leverage will public sector bodies have onprivately run services? How flexible are 30 year contracts and what is theirscope for improvement?
Ownership
Literally,ownership will transfer to private sector providers. High profits combined withpotential cuts to staff jobs, terms and conditions will not provide employeeownership of the service. Shareholders will replace Stakeholders.
Valuefor money is the main rationale of PFI and PPP. When judged against PublicSector Comparators there is a danger that assumptions are made give an unfairadvantage to these schemes. It can beargued that the effect of discounting PFI schemes at 6% in calculating netpresent cost is to unfairly overstate the cost of public sector options.
Theclaimed prospective net benefits of NHS PFI schemes relative to their publicsector comparators appear to be small. For most or all of the NHS PFI schemesso far signed off the estimated net benefit would disappear if the discountrate used to calculate the net present value costs of the different optionswere to be reduced from 6% pa to a more appropriate, risk free, level of 4%.
(Officeof Health Economics report April 2001.)
TheOHE report argues that 4% would be a more appropriate discount rate to use whenassessing PFI bids. This estimate is partly based on an analysis of the factthat the 6% figure is partly designed to reflect the social rate of time difference.This means that the calculation is based on the assumption that payment laterwill be preferred by the population to payment now. Economists Pearce andUlph (1995) have argued that in this context a range of 2-4% probably sets theupper and lower bounds of what is a credible social discount rate.
Ifthe discount rate was 4% then Exchequer funded projects would be shown to bebetter value for money.
Thesame principle of overestimation applies to the calculation of risktransferred.
Itis important that false assumptions are not made about construction costoverruns in NHS construction projects when making value for money calculations.These should be based on present day actual average cost overruns.
7.
Therecord of consultation in relation to PFI projects is not a good one. Anexample is controversial Edinburgh Royal Infirmary proposals. Importantinformation about the implications of the deal was only made public by theScottish Sunday Mail and leaked letters from the Civil Service. The ScottishOffice had not disclosed details of the associated land deal because it wascommercially confidential.
Consultationneeds to be as open as possible. Public accountability must, wherever possiblecome before commercial confidentiality.
Asfar as possible the projected costs to the taxpayer must be made available, asmust the rationale for deciding that PFI/PPP is best value for money.
8.What has been the experience of this form of investment on publicsector employees ? Is the perceived effectiveness of PFI/PPP projects obtainedat the expense of individuals who are providing the service?
Previousexperience of private sector involvement in public services has been oneof cuts in the jobs and terms andconditions of the workforce.
Privatecompanies will be looking for a substantial rate of return on their investmentin PFI projects. In labour intensive public service areas it is difficult tosee how savings will be made except throughcuts in staffing costs.
TheCentre for Public Services Report on the employment impact of the privatefinance initiative (1999)highlights the potentially disproportionate effect ofPFI on women. 78% of non medical NHS staff are women. For example if PFIinitiatives take on all staff relating to servicing buildings, support servicesand administration, on average 72% of these jobs are held by women in the NHS.Similarly, cleaning and catering jobs are female dominated in local government.
TheGMB would want to ensure that firm guarantees are in place for any stafftransferred as part of a PFI/PPP initiative. These are:
GMB Research May 2001