pfi | ukwatch.net

Titan prisons - "consultation" ends, construction begins

Alex Doherty — Fri, 03 Oct 2008 09:13:52 +0000

A new report by the Prisons Reform Trust has accompanied the end of the “consultation” period on the government’s policy of constructing huge new “titan” prisons, which Gordon Brown has stated will mean the beginning of construction of the jails.

The scheme was originally slated to cost £1.2 billion, before ministers doubled the sum, now standing at £2.4 billion, excluding all running and associated costs. They are set to hold around 2,500 inmates, being built around London, the Midlands and the North-West.

An official government review of the program took place at the end of 2007, under Lord Carter. It argued for the construction of new Titan prisons in order to hold the expanding prison population, based on economies of scale. According to the Prisons Reform Trust report, the exercise was cooked in order to produce the desired outcome, and was potentially premised on this. Carter met 51 individuals and representatives from organisations, but only 17 of these were questioned about Titans, and over half of these had a clear vested interest in the program, being construction firms, private prison operators and government departments.

The consultation paper excluded any meaningful discussion of the criticisms of massive prisons, being focused instead on how Titans will function inside the prison system. The terms of “debate” have been shifted from last year, where the focus was on whether Titans should be built, to how they will hold a projected population, to the “consultation” paper where “discussion” was organised around how “Titans can strengthen our ability to provide … comprehensive rehabilitation to individual offenders.” In the words of the PRT report, “it seems as though the government embarked on the search for arguments in favour of Titans only after deciding to go ahead.”

The prisons are almost certain to involve private funding through a private finance initiative. Though the Labour party claimed to oppose private jails whilst in opposition, their use has been expanded massively, along with PFI involvement in the seizure and imprisonment of asylum seekers. 10% of prisons are now run by companies such as Serco and Group 4, who pay their staff less than the government, and by the government’s standards, perform poorly.

Larger prisons are documented to put inmates at higher risk, and to increase the levels of reoffending. At the same time, a recent study by Carol Hedderman at King’s College London has shown that the levels of serious crime have actually remained static for the last five years, and that the increase in prison population has been based on increased rates of incarceration for other kinds of crime.

The Trust highlights that the prison building scheme is being pushed through as the world economy is gripped by a serious crisis, with Britain looking to be severely hit. The clear implication is that economic contraction, and any government-sanctioned austerity, will increase crime significantly as in similar scenarios historically. The prisons will be ready to incarcerate the increased number turning to crime out of necessity and desperation, punishing the victims of the crisis while protecting those responsible, and the system of private property. Strikingly, the program is being pursued at the same time as “reforms” to benefits which will force claimants to work for the dole. The connection between prisons and class society is clear, even if such an analysis is outside of the purview of a liberal organisation such as the Prisons Reform Trust, which would prefer “strong political leadership” on a crime policy with which they agree.

What's the matter with Sunderland?

JamieSW — Tue, 23 Sep 2008 11:16:35 +0000

Ingratitude, if Madeleine Bunting’s apologia for New Labour is any guide, is what is the matter with Sunderland. The city has been ploughed with an avalanche of development cash. A school is to be rebuilt every year for the next fourteen years. Health centres, children’s centres, business parks, new development zones with the marina, fancy apartments and coffee shops… And the locals react by sputtering “you’ve done nothing for me”, slagging off immigrants and voting Tory. There is some weird “disconnect” between Labour’s actually loveable behaviour toward one of its most loyal constituencies and its dismal status in the popular perception. Working class Toryism, in the form of support for a set of sentiments including ‘individual self-reliance’ and ‘community’ and ‘family values’, is on the rise once more, a la 1979. The obvious conclusion is that the left must rally behind the government. Some version of this is likely to be the overall diagnosis of the soft left as Labour loses its so-called heartlands: regardless of all the disappointments and betrayals, despite the warmongering, privatization, pandering to employers and union-bashing, the real problem is the basic inability of the working class to recognise its true allies. The root problem is its affectless indifference and disloyalty, its susceptibility to racism and nationalism, and its gullibility as regards Tory propaganda.

So, what is the truth of the matter? What is the matter with Sunderland? What might Madeleine Bunting have found out had she not been relying upon the word of Chris Mullins MP? One of the most pressing issues facing working class areas in this country, without question, is housing. In Sunderland, as elsewhere, the government has been pressing for the complete privatization of housing stock. Sedgefield Borough Council, for example, having lost a vote in favour of transfer in 2005, has been trying to persuade residents yet again to go with privatization. What is causing the residents to doubt the word of council chiefs is that the company that would take over the houses – Gentoo, formerly the Sunderland Housing Group (eulogised here) – has a track record of failure. The company was awarded an £80m contract in 2002 to regenerate a poor estate called Doxford Park, some six years ago, and it has only recently begun work. Similarly, when thousands of council houses were transferred to the group in 2001, Gentoo/SHG invested millions in new private homes, and neglected to build the rented accomodation it was obliged to build. 6,200 council houses were demolished, sold off or left empty, but the company only built 111 new houses over the next four years. The number of people seeking a home rose from approximately 5,000 to over 19,000. Meanwhile, it did successfully build the private developments, including maritime housing and the Athanaeum – the sort of investment and development that Bunting lauds, albeit with a grudging admission that “critics say” it may not seem of much use to single mothers and those on incapacity benefit.

Bear in mind that Gentoo/SHG is a Registered Social Landlord (RSL), exactly the kind of landlord that the government says we have least to fear from. An RSL is answerable to the Housing Corporation, and supposedly behaves better than other private landlords. If the Housing Corporation doesn’t hold them accountable, then those co-responsible for sealing the deal should. In fact, the behaviour of Gentoo/SHG had been noted before by local Labour councillors Mike Tansey and Brynley Sidaway, and they did try to alert residents and fellow councillors to the problem. Both Sidaway and Tansey rejected stock transfer because the result, where the government had been able to impose its scheme, was a rise in rents and an increase in homelessness. However, by 2006, they had been driven out of the Labour Party for their pains. They became independents, and on the back of a successful campaign against stock transfer a lively local Respect group was built. What they had to say was important, and their actions benefited the people they represented. By contrast, Labour policy at both a local and national level pitted it against its traditional working class supporters. There is a clue right there: those elected Labour Party members who try to represent their constituents effectively have been punished and expelled.

It is important to understand the rationale behind the government’s transfer policy. It wants to fund housing, but it is committed to a taxation structure that cannot raise the necessary funds without hitting the poor harder. So, either local authorities would have to borrow, thus breaking the government’s fiscal rules, or they would have to neglect housing, thus destroying the working class voting base. By transferring homes to private housing groups like Gentoo/SHG, they can allow huge amounts of money to be borrowed for investment, because the costs will be formally borne by the social landlord. If the government were not so committed to a neoliberal policy mix, it could raise taxation on upper income brackets and on corporations, to fund such investment. The ugly side of this neoliberalism is a tendency to blame the poor for their plight. One of the government’s recent proposals, dreamed up by Housing Minister Caroline Flint, was to compel unemployed recipients of council housing to sign degrading “commitment contracts” which compelled them to agree to actively seek work if they wanted to be allowed a council house – thus blaming the unemployed for their situation and forcing them to humiliate themselves in a lifeless labour market at pain of losing their home. Local Labour Party loyalists felt compelled to distance themselves from Flint’s ideas. There is another clue: the government has been complacent about its core working class vote, assuming that they had nowhere else to go, and therefore has scapegoated working class people for its failures.

Another of the government’s prominent policy agendas, so dear to its heart that it made this a central plank in the 2001 election despite over 80% public disapporval, is the private finance initiative. I have written enough about its obscene wastefulness here before. Once again, the rationale behind the policy is that it appears to provide something for nothing: money for investment without incurring debts or driving up taxes in the short-run. But the net result is almost invariably a poorer quality of service and a higher cost. For example, in Coventry, two hospitals were replaced by one hospital, with fewer beds and staff overall, and a final cost of £900m, 30 times higher than it would have been to simply renovate the two existing hospitals and keep the beds and staff. In Northumberland, four fire stations were closed and replaced with two under a £10m PFI scheme. One could go on at some length. In Sunderland, as elsewhere, local government functions including in health, education, road-building, street-lighting and waste management have all been outsourced to private companies under expensive PFI and PPP schemes.

Perhaps the most controversial application of the PFI model is in the national health service. Patricia Hewitt announced in 2006 that there would be big cutbacks in public spending on the NHS. She said that the reason was that generous government investment had not been spent on reforms but on salaries for greedy public servants. In fact, as Allyson Pollock pointed out, the government’s market-driven reforms had created the crisis. The costs of this marketisation consumed between 6% and 14% of the NHS national budget, on a conservative estimate. As a result, thousands of NHS staff were shed in hospitals up and down the country. The impact has, predictably, been to alienate Labour’s usual supporters. One of the main campaigners against the government’s NHS cuts in Sunderland has been a well-known local nurse named Kathy Haq, who had been lauded in 1999 for embarking on an unpaid, voluntary mission to improve healthcare in Bangladesh and who had run a support network for victims of a doctor who had raped patients. Haq might have been exactly the sort of person whom New Labour would wish to win over: a devoted public servant and campaigner, who had worked for the NHS for forty years. But she joined Respect when it was launched in the area in 2006, and became the branch secretary. One reason is that City Hospitals Sunderland Foundation Trust ran up debts of over £5m and therefore made plans to shed 10% of its staff, particularly in the Sunderland Royal Hospital. Patients were also angered when local hospitals started to charge for parking, following the lead set by PFI hospitals across the country. Problems within the NHS have been a prominent theme in the local press. In fact, although Bunting refers to the Tory capture for the Ryhope constituency in a bye-election with a low turnout, she does not notice that a surprisingly large component of Labour’s vote, perhaps more than a third, appears to have been redistributed over some years to an independent local campaigner and former journalist known as Patrick Lavelle, who made his name by campaigning on the NHS. Another clue, then: investment isn’t the same thing as provision, and one cannot disaggregate the money supplied from the way it is spent and the policies underpinning it. If working class voters experience a decline in service, the fact that a large amount of money has been spent on producing the decline makes it even worse. The PFI was originally a Tory policy, but by adopting it, the government has handed the Tories one of their main propaganda planks: higher spending equals more bureaucracy and less efficiency.

Sunderland is one of the poorest places in England. Mainly as a result of the destruction of its extraction and manufacturing industries, it has suffered a declining population, particularly among working age males, and this trend is projected to continue at least until 2023. That means a smaller tax base for the city, especially as those who remain are likely to be those with the least resources. More than fifty percent of its children live in low income families, according to the Child Poverty Action Group, which is well above the national average. Even official unemployment is almost double the national average [.pdf] according to the Office for National Statistics, while a total of 31% of the working age population is estimated to be out of work. Large numbers of people are kept on long term incapacity benefit to conceal the real rate of unemployment, albeit incapacity among older males in former mining areas is in fact quite widespread. The government has a number of solutions for the industrial hinterlands, but among them is not a revival of the manufacturing base or of the unions that can maintain decent incomes. One of the few big manufacturers in Sunderland is the Nissan car plant, which was built in 1986. The plant is symbolic of a supposedly ‘new’ high-tech economy vaunted by neoliberals of all stripes. But Nissan has repeatedly threatened to close the plant or slash thousands of jobs, and has repeatedly been bailed out with millions in government grants. And while it does employ thousands of local people, who are unionised, it is hardly a substitute for the massive industries of the past. The government is committed to a City-based growth policy with a strong pound, and as a consequence has seen well over a million manufacturing jobs lost on its watch. As has been widely noticed by now, this is one reason why the UK economy is particularly exposed to the chaos in the financial markets, and why it stands least prepared to withstand a crash.

Under New Labour, the remaining mining pits in Sunderland were allowed to disappear, with nothing to replace them. Today, the biggest employer in Sunderland is the government, while the services industry is the biggest sector of employment in the city. The council has sought to rejuvenate the economy by gentrifying it, making it into a more tourist-friendly zone, and building up a financial services industry, which is today almost as big as the manufacturing sector. All of these factors make Sunderland particularly susceptible to the toxic situation that we now face: public sector pay cuts, cuts in spending, a crisis in the financial sector, and higher food and energy prices. In addition, while Bunting mentions a disproportionately high rate of single motherhood and incapacity in Sunderland, she does not mention the government’s policies of rolling back single mother benefits and incapacity benefits. These, in addition to a vindictive plan to force the long-term unemployed to do ‘community service’ as if they were criminals, are poison for a local Labour Party seeking to gather votes. Further, in a city with life expectancy well below the national average, the government’s plans to raise the retirement age and privatise the pension system – while demanding that people save money they don’t have to invest in a pension scheme that floats on the oh-so-reliable stock market – is asking for trouble. To that should be added a recent rise in pensioner poverty, when a fifth of pensioners already lived on less than £5,000 a year.

Sunderland is supposedly an example of where the government has genuinely tried to help the poor, yet is losing support from voters who fail to recognise New Labour’s loyalty to them, while imprudently flirting with the Tories. In truth, while New Labour has delivered some very mild reforms, there could hardly be a more dramatic example of its policies failing the working class on the one hand, and punishing them on the other. The story of Sunderland is typical in this respect. There remains one question: will Sunderland go Tory, and if so, will it be for the reasons Bunting suggests? Sunderland still has a majority Labour council, and will probably return a Labour MP even on a relatively low turnout. The worst wipeouts for the government will be in the south-east, while the polls show the Tories making least headway in core Labour areas. Further, there is nothing to support the claim that once heartland Labour constituencies are won over to right-wing sentiments, and Bunting offers no evidence for this assertion. There is certainly nothing comparable to 1979, when Thatcher won on a platform of aggressively right-wing and anti-union policies. David Cameron is successfully appropriating the centrist language and sentiments of New Labour, even positioning themselves to the ‘left’ of the government on some questions. In Wales and Scotland, where there are centre-left and sometimes radical left alternatives, the Tories are not reviving at anywhere near the rate that they have been in England. And while the Tories are likely to be the beneficiaries of government unpopularity in England, the process of party identity breaking down is advancing rapidly for both Labour and Conservative parties. What is the matter with Sunderland is what is the matter with the UK as a whole. The system is failing, the neoliberal solution doesn’t work, parliament is increasingly impervious to our needs, and we’re facing a crisis in which we find elected officials happy to pour money into the City, but extremely reluctant at best to do anything which alters the fundamentally unfair distribution of wealth and power in the society.

Climate Change and the Public Sphere

Ellie Keen — Mon, 07 Apr 2008 22:38:53 +0000

It might seem a long way from public toilets to the politics of climate change, but there’s an important relationship between what is happening to such public spaces and what is happening to the climate. As so often, it is one of the “rich” countries where the notion of the public realm has been most corroded by individualist, marketised ideology – Britain – that provides a vivid illustration of a more general international trend.

In March 2008, the secretary of state for communities and local government noticed that as Britain’s urban areas were hosting ever-busier crowds of daytime shoppers and nighttime revellers, the number of “public conveniences” available to meet their needs was insufficient. Something had to be done.

The solution Hazel Blears proposed is instructive. Pubs, cafés, restaurants and shops are to be paid by local councils to allow the public in to use their toilets (or what other parts of the English-speaking world knows as “rest rooms”). This is a kind of private-finance initiative (PFI) in reverse: one in which public money is diverted to private enterprises so that they can provide what is indisputably a public service.

The alternative seems obvious: to spend the money on refurbishing and maintaining public toilets, without the private go-between. Why isn’t it the first option of a minister whose remit covers the health of “communities”? Because it is – according to a crude cost calculation – less expensive to pay the private sector than invest in the public sector. The problem here – and the insight it can generate – is that the notion of “cost” and “expense” being employed is an impoverished one that fails to recognise the value of the public sphere itself.

The wrong path

The environment is a classic example of a “common-pool resource”: no one can be effectively excluded from using it, but it is finite and diminishing. Common-pool resources are subject to the “free-rider problem”: namely, that people can’t be excluded from benefiting from the resource, and therefore have no self-interested reason for keeping it well-maintained. In fact their self-interest lies in relying on other people to maintain it, while they spend their time doing other things. The popular English phrase that captures this phenomenon is “having your cake and eating it”.

There are a number of possible solutions to the free-rider problem. Many focus on those who do free-ride, but it is less common – and may be more interesting – to attend more to those who don’t. Why would anyone work to maintain a public resource from which they could benefit equally well without doing so? The answer lies in the commitment of those people to the idea of the public realm where the common-pool resource is located.

This suggests a different type of solution to problems like climate change. The most familiar such solutions tend to be written in the language of commerce and contract, according to which self-interested people will only act for the common good when it’s in their interest to do so. So tradable permits combined with a cap on emissions, for example, are proposed as a way to guarantee lower overall emissions.

But from the point of view of the free-rider problem, tradable permits are part of the problem rather than part of the solution – because they reinforce the frame of mind that leads to the problem in the first place. It will always be in the free-rider interests of carbon-traders to set the cap too high and the price of carbon too low – which is exactly what happens all the time.

An alternative frame of mind is needed – one which seeks to maintain the integrity of the common-pool resource because of its public benefit, not because of some private, excludable benefit that might accrue to the individual. This is an explicitly non-contractual approach to collective social action, and one which runs counter to the popular and apparently unassailable “I will if you will” campaign for pro-environmental action.

When this formula is examined more closely, two flaws emerge. The first is that it assumes that the free-rider problem has been overcome – but it hasn’t, since it can’t ever really be known whether other people are fulfilling their side of the bargain. So the contract contains the permanent possibility of its own demise through internal corrosion.

The second problem with the formula is its logical corollary: “I won’t if you won’t”. This is obviously a recipe for inaction, yet in the free-rider world it is the most likely outcome of the contractual approach. Moreover, it becomes even more damaging where the relationship between the individual and government is concerned, since in conditions of widespread low levels of trust in government even in many democratic states, citizens often won’t fulfil their part of the contract because they don’t believe government will fulfil its.

So what is required is a different social logic: “I will even if you won’t”. This seems utterly illogical from the point of view of commerce and contract; but it is entirely rational when it comes to building the kind of social movement that climate-change mitigation requires.

The right shift

This is exactly where the idea of the public realm plays such an important role. The public sphere is where members of a society learn what a common-pool resource is and how to look after it. It is where people develop non-contractual habits, and learn how to cope with free-riders without falling into the trap of believing that the only solution is privatised “incentivisation” – which just makes the problem worse. Taxes, fines, exemptions, rewards and permits all point away from the public towards the private, which is precisely the wrong direction.

To solve the problem of climate change, a broader and wider frame of reference than seems currently on offer is essential. Technological solutions alone are not enough – but nor are political solutions, so long as they run along the same lines that caused the problem in the first place.

This is why Hazel Blears’s favouring of the privatised solution to the problem of public conveniences is bad news not just for late-night revellers but for the fight against climate change. It reinforces the brutal assault on the idea of the public realm which has been such a marked feature of life in Britain over the last thirty years. Yet without this idea, and a commitment to its protection and what it represents, a society’s ability to address key environmental challenges such as climate change is severely damaged.

The fight against climate change is at once technological, political, economic and cultural – and the biggest cultural change the government could effect would be to expand and defend the public sphere. In too many places, however, governments seem to be pushing their citizens in the opposite direction: private-finance initiatives, individual learning contracts, council-house sales, declining library budgets, and – yes – the demise of the public convenience. All these are potent indicators of the corrosion of the public realm and public interest.

The biggest casualty of the rush to privatisation, enclosure and the withering of the public sphere may well be the climate itself. It’s time for a change of outlook – one which will make so many other things, hitherto unimagined, suddenly possible.

Lifting The Lid on PFI

Tim Holmes — Mon, 03 Dec 2007 15:39:36 +0000

This article explains the basics of why the Private Finance Initiative, (PFI), is a bad deal for the taxpayer. We describe here some of the major PFI errors which can now be identified, and we quantify the effects. The results, in terms of the burden being placed on each and everyone of us, are staggering: as we shall see, PFI can well be described as “one for the price of two”. There is now an urgent need for a full public inquiry into the way PFI has operated: there should be a moratorium on the signing of any future PFI deals until required changes have been made: and any past PFI deals shown to involve excessive and unreasonable profits should be reopened.

Although introduced by the last UK Conservative government, PFI was enthusiastically taken on by Labour. It involves private sector suppliers not only designing and building, but also maintaining and operating, major items of public sector infrastructure like schools, hospitals and roads over a large number of years. Instead of the public sector itself borrowing money to pay for the capital expenditure, what the public sector pays is an annual unitary charge for the use of the facility over its lifetime. All of the individual costs borne by the PFI supplier, such as capital repayment and interest charges, maintenance, and service provision, together with supplier profit, are bundled up into the single unitary charge.

The scale of PFI is huge. In Scotland alone, PFI deals in operation or signed cover capital expenditure of £5.1 billion, almost all under Labour. A further £1.7 billion future deals are in preparation.

Serious concerns about PFI emerged very quickly. One concern, for example, was whether risk was actually transferred to the private sector. Another concern was that the PFI approach also seemed to have an effect on the type of project being undertaken: there have been many examples where a public authority has started off with plans for a fairly modest refurbishment, but has ended up having been convinced that what was actually required was a much more expensive new build project. Yet another concern was with the scale of PFI projects: many projects are so large and complex that the degree of competition has been limited. As one supplier noted, an advantage of PFI from the supplier’s point of view was that “tender costs and complexity reduce competition”.

But the major worries about PFI have related to cost. For example, it became clear that many new hospitals were having to be planned on the basis of reduced bed numbers, in order to make the forecast unitary charge payments affordable: (for example, to make the New Royal Infirmary of Edinburgh PFI scheme affordable, a 24 per cent reduction in acute bed numbers was required across the Lothian Health Board area.) Suspicions really started to crystallise when several PFI suppliers were able to extract large capital gains from their PFI projects, at an early stage in the life of the project, effectively by capitalising their anticipated future profit streams. In several cases, the capital gains extracted were several times the original inputs of capital by the PFI contractor.

Concerns such as the above have been articulated by a number of critics, notable among these being Allyson Pollock, now at Edinburgh University, and her colleagues. The Government, however, (both at Westminster, and the previous administration at Holyrood), have countered criticism by their usual technique of unsubstantiated assertion: and they were greatly helped in this because the required detail about projected costs and finances was hidden away under the cloak of commerciality in confidence.

Recently the situation has radically changed: what has happened is that detailed financial projections for the operation of PFI schemes have started to become available, because of the operation of the Freedom of Information Act, (FoI). These are the actual financial projections produced by the consortia running the PFI schemes: and are normally included as confidential annexes to the Final Business Cases of PFI projects. Unison has recently mounted a concerted campaign using FoI to request copies of large numbers of full Final Business Cases. Most of the responses still contain large blanks where the financial information has been removed: however, the vital financial detail has been provided for a number of important PFI projects. This has allowed us to analyse a number of the financial projections, and this provides the basis for the key findings on which we report below.

Before moving on to the detail however, we should record our appreciation both of Unison and the FoI Act which has enabled this information to be brought into the open.

As noted above, the PFI consortium charges an annual unitary charge to the public sector client. This unitary charge has to pay for all the costs incurred by the provider, and yield a profit. Typically, to finance the initial construction, the PFI consortium will borrow the necessary capital. Most of the finance has tended to come from banks at a “competitive” rate. The remainder is usually made up of a mixture of what is called subordinate debt, that is money lent by the members of the consortium itself at a higher rate of interest, and of equity, where members of the consortium put share capital into the venture. Usually, the amount put in by the consortium by way of subordinate debt and share capital would be around 10 per cent of the capital value of the project.

Our examination of detailed financial projections for a number of PFI projects confirms just how hugely profitable PFI can be for the private sector consortia. But the important thing which our work suggests is that a large part of this profitability stems from two elementary mistakes made by the public sector in their negotiation of PFI contracts. We will start by looking at the nature of these mistakes first, and then consider their financial implications. Further details of some of the work reported on here can be found on our website, at www.cuthbert1.pwp.blueyonder.co.uk

The first key mistake we uncovered related to the way in which the unitary charge payment to the PFI provider is uprated, or indexed, through time. Normally, some simple uprate rule is applied to the unitary charge, whether as a whole or to each of its constituent parts, so that they increase in line with inflation, or some fraction of inflation. However, using a simple uprate rule like this neglects the fact that a major part of the supplier’s financing costs, namely, debt charges, will not be increasing, but will be declining through time: this is because, as debt is repaid, the payment of interest each year will decline. The difference, between that increasing element of the unitary charge which covers financing costs and profit, and the declining cost of servicing debt, is available as a large profit: a profit which has not been earned through excellent performance, but through what amounts to financial sleight of hand.

This, however, is where we come to the second major mistake the public sector has made in the way it considers PFI projects. One of the key measures which the public sector uses in assessing the profits made by PFI providers is what is called the Internal Rate of Return, (or IRR), on the finance put into the project by the consortium. This is called the IRR on equity, (though here “equity” is interpreted as provision of finance by the consortium by means both of subordinate debt and equity proper.) The IRR is, effectively, the projected rate of interest earned on the consortium’s initial financial input to the project. The public sector regularly quotes the IRR on equity for individual PFI projects, usually as a justification for the reasonable rate of return being earned by the operating consortium. The big mistake is that IRRs are typically quoted on their own: but in fact the definition of IRR implies that there is a notional outstanding debt, on which this IRR is being earned. IRRs on their own are meaningless: the average debt on which this rate of return is actually being earned must also be quoted. A little thought tells us that, if the consortium is earning an IRR of 15 per cent to 20 per cent per annum on equity, (which the Treasury seems to regard as reasonable), but postpones taking dividend payments until near the end of the project, then the outstanding debt on which the IRR is being earned will rapidly snowball: so the actual financial return to the consortium, which is determined by the IRR and the average outstanding debt, can only be calculated if both the IRR and the average outstanding debt are quoted together.

So what does the data tell us about the size of the profits earned? Let us start with one example, a hospital project in England with a capital cost of just under £70 million. To finance the building the consortium borrowed over £60m from banks, at an interest rate of just over 6 per cent: the consortium itself provided almost £10m subordinate debt for the project, for which it received a more generous 15 per cent, and the consortium also put in an equity stake of £1,000: (no, we have not misread the decimal point: we genuinely mean one thousand pounds). The project shows the classic signs of inappropriate indexation, with the senior debt being paid off quickly, and hence senior debt charges declining rapidly – but with the whole unitary charge being indexed over the full thirty year life of the project at 3 per cent per annum. As a result, the projected returns to the consortium are eye-watering: the £1,000 equity input is projected to earn dividends totalling to more than £50m. Taking account of projected undistributed reserves at the end of the project, the consortium’s own financial projections indicate that the consortium is expecting to reap a cash return of more than £90m in total on its investment, (by way of subordinate debt and equity), of less than £10m.

Cash returns on this scale are staggering. But simply aggregating cash returns accruing over a long time period is misleading, since a given amount of cash today can be invested, and is therefore worth more than the same amount of cash at a future date. It is also useful to have a standard approach to looking at different PFI financial projections – all of which are slightly different in detail. To get round these two problems, we developed two standard summary measures for comparing different PFI schemes.

First, we split the projected sequence of unitary charge payments for a PFI scheme into its service element, (that is, that part covering operations and maintenance), and what we have called the non-service element, (that is, covering interest and repayment of principal on senior and subordinate debt, taxation, and profit). We then discounted the non-service element of the unitary charge by an appropriate discount rate to give the Net Present Value (NPV) at the start of the project: and we compared this NPV with the original capital cost of the building and equipment. The discount rate we chose was the interest rate which the public sector would have paid if it had borrowed the resources itself: so the comparison of the NPV with the capital cost gives us an indication of how much more the public sector is paying for the building and equipment under PFI than if it had been able to go out and purchase these directly.

For the English hospital example discussed above, the NPV of the non-service element of the unitary charge is, in fact, almost double the original capital cost of the hospital. In other words, for this hospital, it could truly be said that the taxpayer has got “one for the price of two” through using PFI. But this is by no means a unique example. We have analysed in detail three Scottish projects. For one of these, a PFI funded major educational establishment, the NPV of the non-service element of the unitary charge was more than double the capital cost – so this example is actually marginally worse than the English hospital example. For a recent significant schools project, the NPV of the non-service element of the unitary charge was more than 50% above the capital cost.

The second standard summary measure we developed relates to the internal rate of return (IRR). For each of the projects we have examined in detail, we calculated the pre-tax IRR on equity: (that is, on equity broadly defined as subordinate debt plus equity proper). But in addition, we also calculated the average notional outstanding debt on which this return was earned. In all of the three cases considered above, the pre-tax return on equity was just above 20 per cent: (which would correspond to a net post-tax return in the mid-teens, which the Treasury would probably regard as acceptable). However, the really significant point is that, in each case, the average debt on which this IRR was earned was very much larger than the actual input of capital via subordinate debt and equity: in the most extreme case, the average debt was more than 2.5 times the initial input of subordinate debt plus equity: in another case, more than twice: and in another case 1.5 times. This confirms that the IRR alone, (generous as it may seem), in fact grossly underestimates the true scale of return accruing to the operating consortia in some PFI projects.

Our analysis confirms therefore, that the returns arising from inappropriate indexation are enormous – as we have seen “one for the price of two” is an appropriate designation of some PFI schemes.

What we have described so far in this article are definite errors and mistakes we have uncovered in the practice of PFI. It would be wrong, however, for us to give the impression that we understand everything that is wrong with PFI – far from it. Our detailed examination of PFI financial projections indicates that there are other important aspects of the process which require much closer investigation. For example, once the construction stage of the project is completed, there is often projected to be a significant financial reserve left from the original project finance, which is then paid into reserve accounts to earn interest for the operating consortium. At its worst, this could mean that the public sector is paying, via its expensive unitary charge payment, to fund the consortium to borrow money which the consortium then pays into an interest bearing account for its own ultimate benefit. There needs to be a much more detailed accounting for the cost elements which are actually contributing to the cost basis of the unitary charge.

What we have shown in this article is that, once PFI is examined in the light of the facts which are now becoming available because of the Freedom of Information Act, it can be seen to be nothing short of a disaster. The effects, however, go beyond the question of costs alone – even though no country, whether it be Scotland or the UK as a whole, could long support buying its capital assets on a “one for two” basis. But in addition, PFI has also had a marked, and negative effect on the industrial structure of Scotland. Given the large size of PFI projects, local firms have great difficulty in competing. The effect, in the Scottish context, is that local firms have either been squeezed out, or, (if they did get a foothold in the PFI world), are more susceptible to being taken over by international players attracted by large PFI profits. So not only are we paying excessively for PFI services: at the same time PFI contributes to our losing control of our own economy.

So what needs to be done: we suggest that a number of actions are required. Firstly much more needs to be done to improve the availability of information. The detailed financial projections should be published for all past schemes, and also for any future schemes. In addition, standard indicators should be published for all schemes. In the light of our own work, we suggest such indicators should include the Net Present Value of the non-service element of the unitary charge, in comparison with the capital value: and also the projected internal rate of return on equity, together with the corresponding average notional outstanding debt on which the IRR will be earned.

Secondly, any future PFI projects should be unbundled into smaller projects as far as feasibly possible, so that a genuinely competitive market has the chance to become established, and to allow local firms to compete.

Thirdly there has clearly been a systemic failure in the existing mechanisms designed to secure value for money from PFI schemes. There needs to be a full and detailed inquiry to establish exactly why the reality of PFI as it is now emerging is so different from the utopian view presented by PFI adherents like Partnerships UK.

In our view the problems with PFI are so grave that tinkering is not the appropriate approach at this stage. We would seriously suggest that there should be a moratorium on all future PFI projects, until the full facts of what has gone wrong, and why, have been established: preferably this should be done through a public enquiry. Moreover, if it is established that excessive and unreasonable profits have resulted from past PFI schemes, then efforts should be made to re-open them.

Margaret Cuthbert is an economist. Jim Cuthbert was formerly Chief Statistician at the Scottish Office.

Declining Hygiene and C. Difficile Deaths

Tim Holmes — Thu, 08 Nov 2007 19:50:37 +0000

A report by the government-funded Healthcare Commission has revealed that 90 people died from an outbreak of the infection Clostridium difficile (C. difficile) in three hospitals in the southeast of the country between 2004 and 2006.

The annual health check also revealed that one in four National Health Service (NHS) Trusts, government-appointed bodies tasked with managing hospitals, failed to meet basic standards of infection and hygiene control across England. The report concludes that the hospitals with the worst outbreaks were mismanaged by the local trust.

C. difficile is the most significant cause of pseudomembranous colitis, an infection of the colon.

The commission also found that 20 hospital trusts across the country had even higher rates of infection. Failures especially highlighted were dirty equipment and wards, with nurses too rushed to wash hands and patients left to lie in their own excrement. There were also concerns of misprescribing antibiotics to patients with high risk of C. difficile infection, which often results from the eradication of the normal microorganisms in the digestive tract due to the use of antibiotics. The Health and Safety Executive (HSE) and Kent Police are investigating the Tunbridge Wells and Maidstone NHS Trusts for possible criminal negligence.

After the chairman of the NHS Trust in the area resigned over the crisis, a new case of infection, this time a norovirus outbreak (the major cause of gastroenteritis), was reported at a Maidstone hospital criticised in the report. A ward was isolated after 16 patients showed symptoms of the virus. A nurse told reporters that cleaners at the hospital did not “have the time, the manpower, even the morale.” Healthcare campaigners told reporters they knew of another four trusts in the UK that had had norovirus outbreaks in the previous fortnight.

According to a front page story in the local press, one nurse who was admitted to the Kent & Sussex Hospital described her shock at the appalling conditions: “I couldn’t believe the conditions were so terrible, there were faeces on the floor beside my bed for two days, the facilities for hand washing were terrible, rubbish bins containing contaminated towels would be taken across the ward.” After leaving the hospital, she became ill again soon afterwards, but refused to go back because the conditions were so bad.

Another report gave an account of a patient’s experience of flooding in a ward with a defective shower. When he asked why maintenance was not brought in, he was told, “there were so many levels of management, to get something done took ages.”

A son and daughter of a mother admitted for surgery in 2004 spoke to the press when they heard about the latest outbreak. “Our first reaction to the hospital was that it was like going back to the 1950s, but without the cleanliness,” they said. “We wanted our mother out of there and home as quickly as possible.”

The author of this article also attended the Kent & Sussex Hospital for a two-day stay after an accident in 2003. One of the wards was in isolation due to an infection at the time, and I was asked to leave as soon as I could walk so as to minimise the risk of the infection spreading.

Karen Jennings, head of the health workers’ union Unison, complained: “Responsibility is being diverted away from parliament and we are losing any sense of collective responsibility or equity in the NHS. The superbug phenomenon can be attributed to the contracting-out process—hospitals had 50 percent more cleaners in 1982 than in 2007.”

The report notes constant pressure to meet targets in relation to an outbreak of C. difficile in 2006: “[M]any staff told us that senior managers were still reluctant to implement major infection control measures, such as closing wards or using buffer beds to separate infected patients from others on a ward. They said this was because of the shortage of beds and the need to meet targets.”

The report also revealed that “The vast majority of nurses and other clinical staff interviewed considered that poor care was in large part due to having inadequate staffing levels.”

Despite the seriousness of the findings, and the explicit criticism of the NHS Trust, only the board chairman has resigned. The former chief executive of the trust left the board days before the report was released, with a severance deal believed to be worth between £250,000 and £400,000.

After this deal came to light in the press, the health secretary suspended the pay-out, but this could well be reversed. Although the government has the power to remove or discipline individuals under Section 66 of the NHS Service Act, so far they have been content with the single resignation and some reshuffling of the trust leadership.

In an attempt to deflect attention from impossible financial targets and understaffing imposed by the government, the health minister, Lord Darzi, told MPs that the problem was “a leadership issue.” But however culpable are individuals within the Trust, the real responsibility lies with the policy makers in the government.

James Lee, the former chairman of the Trust, made a report to the health secretary that called for a “root and branch review of all aspects of nursing” in an attempt to limit the damage of public confidence in the Trust and deflect it on to healthcare workers. But in his resignation letter, Lee pointed to financial constraints as a major contributing factor to the outbreak: “We had to be concerned about finance because this trust has been struggling with a state that is pretty close to bankruptcy….When I took over five years ago I felt it would be a wonderful experience because of all the money the Government was pouring in. Instead it’s been five years of sheer hell. It has just been a question of cutting costs.”

The Trust’s position as bureaucratic intermediary between government officials and health workers leaves it unable to satisfy either side, as Lee’s complaints reveal. On the one hand, the government, far from pouring money in, is determined to push ahead with plans to cut costs, inevitably leading to more privatisation of key services such as cleaning. On the other, health workers are being pushed to fulfill targets that cannot be reached with diminishing resources.

The principle of socialised healthcare—free and universal regardless of status—has already been seriously undermined by the emergence of a two-tier health system in Britain. Through instruments such as the PFI initiatives, a higher level of service through private healthcare is only available to the few who can afford it, while socialised healthcare is being steadily eroded. The majority are left with healthcare that is being deprived of essential resources needed to continue providing a decent level of service. In addition, servicing the debt to private investors has become one of the major drains on hospital finances.

Prime Minister Gordon Brown promised C. difficile and the “superbug” MRSA, which affects particularly people with open wounds and weakened immune systems, would be tackled by “a deep clean of hospitals and the creation of new isolation wards.” These measures, even if enacted, will have negligible effect in the long term, and simply provide a temporary cover for a deepening crisis brought on by the Labour Party.

The C. difficile outbreak, whilst very serious in itself, is just the latest in a series of similar cases that have broken out with increasing regularity. The constant pressure to cut costs and force workers to cover for inadequate staffing levels is ultimately responsible for these new deaths.

Across the country, there have been reports of poor cleaning and lapses in basic hygiene, overcrowded wards, and practices likely to increase infection rates, such as “hot-bedding,” where beds are immediately occupied again soon after being vacated.

The scale of the problem cannot be sufficiently explained by isolated oversights of basic hygiene procedures, leadership problems, or the emergence of new and especially virulent superbugs. Rather, these outbreaks are symptomatic of a much wider systemic problem that cannot be understood without a clear appraisal of the political role played by successive governments in relation to the NHS.

The privatisation by stealth first initiated by the Conservative government during the 1980s has continued under the Labour government, anxious to press ahead behind the backs of a public hostile to the process. This has involved harassing hospitals with ever tighter controls and targets, introducing more bureaucratic levers to carry through these measures with multi-tiered management levels (most of which are divorced from a working knowledge of medical practice), and the establishment of PFI hospitals and “independent sector treatment centres”.

PFI hospitals are developed by private firms and then leased out to the NHS, whilst core professionals are retained in the public sector. They have been a means of transferring public services (such as housing, roads and schools) into private ownership and control to enrich a favoured elite. PFI was the brainchild of the Conservative government in 1992, but has since been taken up and extended by Labour in its determination to continue the slashing of social expenditure. Detailed information on the trend of PFI investment is difficult to obtain. The deals are exempt from the Freedom of Information Act due to “commercial confidentiality.”

This month, the government announced that the largest US healthcare corporation, UnitedHealth, along with other corporations that preside over the private US health service, one of the most inequitable in the world, will be introduced into Britain in an “advisory” capacity. This is to set them up for management positions and lucrative outsourcing of those illnesses and treatments that can guarantee high profit returns.

The Guardian revealed this month that Tony Blair’s former advisor, Simon Stevens, along with other Labour health secretaries, has taken up a lucrative position in the European department of UnitedHealth. No doubt, these Labourites will be working in an “advisory” capacity on the future of the NHS.