1. Introduction: The background to PPPs in the UK
PPP deals are “a millstone round the necks” of London hospitals1
Sadiq Khan, Mayor of London
Public Private Partnerships (PPPs) began in the UK in 1992, known locally as the Private Finance Initiative
(PFI). PPPs began in the transport sector with construction of the Skye Bridge toll road in Scotland in 1992.2
Their scope quickly expanded as a means of increasing the role of the private sector in parts of the public
sector where privatisation was publicly unacceptable.
PPPs operate like a sale and leaseback agreement. The government pays to use infrastructure designed,
financed, built, owned and operated by a consortium of private financiers and providers, via a Special
Purpose Vehicle, a legal entity set-up to control and run public infrastructure, until ownership passes to the
State, on completion of payment.
PPPs transformed the public provision of infrastructure from a public good, into an investment ‘asset class’
for banks and private equity investors to extract wealth from the public sector, via contracts underwritten
and enforced by the state. The resulting cultural shift, observes researcher Nick Hildyard, means:
“infrastructure is less about financing development (which is at best a sideshow) than it is about developing
finance.”3
Ideological arguments for PPPs and the myth of private sector efficiency
The ideology underpinning PPPs in the UK claims the private sector is ‘more efficient’ at infrastructure
delivery than governments, reducing costs and time delays. The evidence base for this belief is dubious. The
IMF concedes “it cannot be taken for granted that PPPs are more efficient than public investment and
government supply of services”.4
Analysis by UK academics has found the case supporting PPPs in the UK fails to stack up. Value for money
benchmarking by the UK finance ministry (the Treasury) against a ‘public sector comparator’ was “not
evidence based, but biased towards PFI.”5
From the early 1990’s until 1997, adoption of PPP was beset by teething problems. Public signatories to PPP
deals struggled with the complexity of Design, Build, Finance and Operate contracts, locking the government
into monopoly service providers for the operation of public infrastructure for 30 years.
From 1997, a new Labour government created a Treasury Taskforce staffed by bankers and accountants to
fast-track PPP procurement, policy and advice from within Government. Rebranded “Partnerships UK”, it
1
https://www.theguardian.com/uk-news/2015/aug/20/sadiq-khan-pfi-debt-london-hospitals-nhs-trusts
https://en.wikipedia.org/wiki/Skye_Bridge
3 Hildyard N, Yield of Dreams. 2013
4 https://www.imf.org/external/np/fad/2004/pifp/eng/031204.pdf
5 http://www.allysonpollock.com/wp-content/uploads/2013/04/PMM_2007_Pollock_TimeCostOverrun.pdf
2
1
was 51% privatised by Chancellor Gordon Brown in 19996 - sold to leading financial firms, with commercial
stakes in PPP, creating clear conflicts of interest.7
Private Shareholders in Partnerships UK. Source
Aided by Partnerships UK, between 1997 and 2001, the number of PPP contracts signed per year increased
from 20 to 70. Project capital value increased from $1 billion to $5.6 billion, reaching a peak of $10 billion in
2007/08 before the global financial crisis halted bank lending as credit and insurance markets froze.
Figure: UK PPP Contracts 1992 - 2015
6
7
https://en.wikipedia.org/wiki/Partnerships_UK
http://www.building.co.uk/pfi-revolution-fails-to-inspire/4702.article
2
[More up to date figures are Financial Close data 2013 and 2014
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/387228/pfi_projects_2
014_summary_data_final_15122014.pdf 2015 data
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/504374/PFI_PF2_proje
cts_2015_summary_data.pdf ]
In 2009, just 25 PPP projects reached financial close, with a capital value of $1.9 billion.
Following acknowledgment of the failings of PPPs, in 2012 PFI was rebranded as the modified PF2 (see
section 5).8 PPP deals signed between 2012-2015 failed to match levels seen pre-crash, due to the loss of
investor confidence, government cuts and banks’ unwillingness to lend long-term.9
Section 2: The financial impacts of UK PPPs
“One of my biggest concerns is that many of the hospitals now facing huge deficits are seeing their situation
made infinitely worse by PFI debt.”10
UK health minister, Jeremy Hunt MP, speaking in 2015
8https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/205112/pf2_infrastructure_new_approach_to_p
ublic_private_parnerships_051212.pdf
9https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/504374/PFI_PF2_projects_2015_summary_data.
pdf
10 http://www.theyworkforyou.com/debates/?id=2015-06-02a.448.3&s=debt#g449.2
3
Proponents of PPPs claimed they would lead to more private investment without increasing public sector
borrowing figures, an attractive prospect for Governments.
PPP delivers new public infrastructure, financed by banks, not directly by Government. PPP is deemed “off
balance sheet” for accounting purposes - giving the impression of prudent financial management. However,
annual payments have to be made to private companies in exactly the same way as if the government had
to make debt payments if it had borrowed to build infrastructure directly.
The hidden cost to the public sector is that the interest rates payable on PPPs have been twice as expensive
as on UK government borrowing11, meaning overall, PPPs cost the taxpayer far more than if the government
borrowed to fund the project itself. Instead, the government, via traditional borrowing, tax and spend could
fund considerably more investment out of existing revenue, instead of facing higher costs through PPPs.
The macro-economic impact of PPPs is that Keynesian infrastructure stimulus by Government is unlikely to
be effective when reliant on PPPs. Banks support PPP projects when the economy is booming, but withdraw
lending in a crisis. PPPs therefore increase economic boom and bust cycles. Keynesian infrastructure
spending decreases market volatility by increasing Government spending in recessions and raising taxation
during boom periods.
A 2015 UK National Audit Office report found private finance investment declined in the post-2008 financial
crash period. In the 5 years to 2013-14 investment averaged $2.9 billion a year compared with $5.8 billion
for the previous 5 years, a fall of more than half. Spending on servicing existing PPP debt increased from
$8.8 billion in 2009-10 to $12.5 billion in 2013-14.12
11
12
http://www.publications.parliament.uk/pa/cm201012/cmselect/cmtreasy/1146/114606.htm
https://www.nao.org.uk/wp-content/uploads/2015/03/The-choice-of-finance-for-capital-investment.pdf
4
The IMF note: “Instead of government making upfront payments to cover the cost of building an asset, the
private sector bears this cost and government covers the opportunity cost of capital as part of its service
payment to the private sector. This is how PPPs can be used to record initially lower government borrowing
and debt than with traditional public investment.”13
The IMF warn: ‘PPPs can be used mainly to bypass spending controls and move public investment off budget
and debt off the government balance sheet, while the government still bears most of the risk involved and
faces potentially large fiscal costs’.14
This has been the case in the UK. Since 1992 PPPs yielded public assets with a capital value of $71 billion.
The UK government will pay more than five times that amount under the terms of PPPs used to create
them.15 In some cases, like Edinburgh Royal Infirmary,16 the government will never own the asset, because
the PFI was a leasing agreement.
Reliance On Consultants and Expensive PPP Advisory & Transaction Fees
Big four accountancy firms enjoy an effective monopoly on PPP consulting, advising both sides of a PPP
contract, often auditing the companies involved.17 One firm advises on government procurement, another
advises the PPP consortium of banks and construction firms.18
Accountancy Firms As Advisors on UK PFI Contracts via Unison19 HM Treasury
PFI/PPP deals
Project Capital
PFI deals 2002 Accountancy Firm
(1991 – 2002
Value 1991-2002
2015
(actual Unison)
$b (actual Unison)
(projected)
PwC
142
$19.4
127
KPMG
114
$27.6
102
EY
66
$5.5
59
Deloitte
40
$2.4
36
Arthur Andersen
32
$12.9
n/a
Total
394
$67.9
325
Combined Totals
PPP Projects
1991-2015 =
722
Project Capital
2002 - 2015
Value $b
$26.6
$38,4
$7.6
$3.4
n/a
$76,4
Capital Value 1991
– 2015 =
$144.3**
13
https://www.imf.org/external/np/fad/2004/pifp/eng/031204.pdf pg 19
https://www.imf.org/external/np/fad/2004/pifp/eng/031204.pdf
15 The payments do include service and maintenance costs, so more than the capital value.
16 http://www.scotsman.com/news/exclusive-we-ll-pay-163-1-2bn-for-pfi-hospital-but-never-own-it-1-1247575
17https://www1.toronto.ca/inquiry/inquiry_site/cd/gg/add_pdf/77/Procurement/Electronic_Documents/Miscellaneous/privateinter
est.pdf
18 Brooks, R, Craig, D. 2006. ‘Plundering the Public Sector: How New Labour are Letting Consultants Run Off with £70 Billion of our
Money’
19https://www1.toronto.ca/inquiry/inquiry_site/cd/gg/add_pdf/77/Procurement/Electronic_Documents/Miscellaneous/privateinter
est.pdf
14
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**Note The capital value of PPP projects consultants advise upon is double the total value of PPP contracts
signed ($72.1bn) - because accountancy firms advise both sides of a PPP contracts.
The European Investment Bank found ‘transaction costs’ for PPP deals has ‘not received much attention’, yet
amount to ‘well over 10% of total project capital value.’20 Testimony from Richard Abadie to the UK
parliament’s Treasury Select Committee suggests PwC charge $312,500 - $500,000 in advisory fees for
school PPP projects and $625,000 - $1,000,000 per Hospital.21
Increasing Size And Complexity of PFI Projects
Due to high, fixed transaction costs (legal/ advisory fees) on PPP contracts, there is an observable trend
towards larger, more complex projects22and extended procurement timeframes.23 Increasing size and
complexity in PPP infrastructure projects – said to be a signifier of corruption in developing countries24, is
observable within UK PPP projects, such as Barts Hospital, which cost $1.4bn to build, but will cost UK
taxpayers $9.1 billion to repay.25
Cost of PFI Debt and Public Value for Money
Interest rates payable on $388 billion PPP debt are more than double the Bank of England gilt rate at which
the UK government borrows.26 The average interest rate currently paid by PPP projects is 8%, whereas the
UK government can borrow for 30 years at 3.5%. Paying off a PFI debt of $1bn costs taxpayers the same as
paying off a direct government debt of $1.7bn.27
In 2011 a review by the UK Parliament’s Treasury Committee found that “The use of PFI has the effect of
increasing the cost of finance for public investments relative to what would be available to the government if
it borrowed on its own account.”28 A 2015 review by the UK National Audit Office found that investment
through PFI schemes cost more than double what it would cost if the government had borrowed directly,29
and this doesn't include the cost of paying private companies profit under PFI.
The UK parliament’s Treasury Select Committee review of PFI in 2011 did not see “any convincing evidence
that savings and efficiencies during the lifetime of PFI projects offset the significantly higher cost of
finance.”30 The Committee continued:
20
http://www.eib.org/attachments/efs/efr_2005_v03_en.pdf
http://www.publications.parliament.uk/pa/cm201012/cmselect/cmtreasy/1146/1146.pdf
22 https://www.nao.org.uk/wp-content/uploads/2015/03/The-choice-of-finance-for-capital-investment.pdf - Fig 7
23 https://www.nao.org.uk/wp-content/uploads/2015/03/The-choice-of-finance-for-capital-investment.pdf - Fig 17
24 https://www.imf.org/external/pubs/ft/issues12/issue12.pdf
25 http://www.independent.co.uk/money/loans-credit/crippling-pfi-deals-leave-britain-222bn-in-debt-10170214.html
26 https://www.nao.org.uk/wp-content/uploads/2015/03/The-choice-of-finance-for-capital-investment.pdf
27 http://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news/pfi-report/
21
28
http://www.publications.parliament.uk/pa/cm201012/cmselect/cmtreasy/1146/114608.htm
National Audit Office. (2015). The choice of finance for capital investment. March 2015. http://www.nao.org.uk/wpcontent/uploads/2015/03/The-choice-of-finance-for-capital-investment.pdf
29
30
http://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news/pfi-report/
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“PFI funding for new infrastructure, such as schools and hospitals, does not provide taxpayers with good
value for money and stricter criteria should be introduced to govern its use.”31
[Redo to contrast rate of PFI finance with UK GILT rate]
The UK Government’s National Audit Office (NAO) observed PPP finance costs increased since 2008, during a
period Bank of England base rates were steadily falling: “The case for using private finance in public
procurement needs to be challenged more, given the cost of debt finance increased since the credit crisis by
20 per cent to 33 per cent.”
UK investment in infrastructure has not kept pace with other countries
In the period when PPPs have been a main way for the UK to invest in public infrastructure, the UK has failed
to keep up with the rate of infrastructure investment in similar economies. While globally there is no
comprehensive internationally comparable data on quality of infrastructure based on objective criteria
(OECD 2015)32, the World Economic Forum data ranks the UK 27th globally for perceived quality of
infrastructure, with government spending well below the USA, France and Switzerland.33 Countries scoring
highly on the WEF index for high quality of infrastructure all enjoy substantial government investment.
31
http://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news/pfi-report/
http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=ECO/WKP(2015)62&docLanguage=En pg 8
33 http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=ECO/WKP(2015)62&docLanguage=En
32
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Creation of secondary market in PPP infrastructure assets and windfall gains
PPPs are initially financed by banks and private equity, receiving a ‘risk premium’ during the construction
phase to offset losses, for eg, a construction firm going bankrupt, and the asset not being built.
Once construction is completed and construction risk evaporates, the PPP consortium refinance the project,
at lower rates of interest, with ownership shares transferring to pension funds and long-term institutional
investors, requiring stable low-risk returns.
Refinancing 12 PPP projects between 1999-2005 resulted in a $178.25m gain for PFI companies, compared
to just $34.1m for the public sector. Refinancing enables the private sector to increase profitability of PPPs,
over and above the average 14.5% internal rate of return, built into projects before refinancing.34 At Norfolk
and Norwich Hospital – PPP refinancing created a windfall gain of $145 million35 for the private contractor
Serco.
Ring-fenced PPP Repayments Result in Service and Staffing Cuts to Trim Costs
PPP repayments are ‘ring-fenced’, meaning once signed, it’s extremely difficult to renegotiate or trim costs
on PPP contracts. Public authorities are forced to reduce staff numbers, and levels of services as repayments
increase and budgets come under pressure.
Nigel Edwards, head of policy for the National Health Service (NHS, UK public health service) Confederation,
notes: "A hospital with a PFI scheme [is] contractually bound to keep maintenance up, and spending 10-15%
on your buildings means all the other efficiency and productivity gains you need have to come out of only 8590% of your budget."[36
John Appleby, chief economist at the King's Fund health think-tank, said:
"It is a bit like taking out a pretty big mortgage in the expectation your income is going to rise, but the NHS is
facing a period where that is not going to happen. Money is being squeezed and the size of the repayments
makes it harder to make the savings it needs to. I don't see why the NHS can't go back to its lenders to
renegotiate the deals, as we would with our own mortgages.37"
PPP Asset ‘Flipping’ on Secondary Markets by Infrastructure Funds
PPP refinancing means infrastructure funds and other investors, commonly located offshore, in tax havens,
owning, controlling and on-selling UK infrastructure, virtually tax-free.
34http://www.european-services-strategy.org.uk/outsourcing-ppp-library/pfi-ppp/financing-infrastructure-21st-century/finance-
infrastructure.pdfhttp://www.european-services-strategy.org.uk/outsourcing-ppp-library/pfi-ppp/financing-infrastructure-21stcentury/finance-infrastructure.pdf
35 http://www.publications.parliament.uk/pa/cm200506/cmselect/cmpubacc/694/694.pdf
36 www.ft.com/cms/s/0/589828ee-07bf-11df-915f-00144feabdc0.html
37 http://www.bbc.co.uk/news/health-10882522
8
Margaret Hodge MP, former Chair of the UK Parliament’s Public Accounts Committee scrutinising UK public
spending called the ‘flipping’ or resale of PPP contracts on the secondary market: “a total scandal - we’ve all
been ripped off”38 “I’m afraid we got it wrong. I was a supporter at the time but I have completely gone off
the whole concept. We got seduced by PFI.”
Hodge added it was “scandalous” many of the funds buying up the contracts are based in tax havens. One of
the early arguments in favour of PFIs was that taxpayers would benefit from contractors’ profits due to the
corporation taxes they would pay. “But profits are going offshore and to shareholders.”
PPP Enables Offshore Ownership of Public Assets
In 2011, the Public Accounts Committee warned: “City investors made bumper profits from taxpayers by
buying up contracts for schools and hospitals funded through PFI, taking the proceeds offshore.”39
“The committee criticises Treasury for assuming PFI contractors would pay tax, when many are based in
offshore tax havens.”
“Government should revisit tax assumptions it builds into the cost/ benefit case for PFI. It assumes
Government tax revenue from PFI investments, but one of the largest PFI investment funds told us 72% of
shareholders are registered offshore40
Former tax inspector Richard Brooks, who left HMRC after the tax Department signed a PFI deal with
Bermuda based Mapeley Steps41said: “All told, by 2012, over 200 PFI companies were partly owned offshore,
more than 70 of them running health service projects. By my calculations, 168 state schools, many of which
are run under a single PFI contract are at least partly owned offshore. That so many public assets are
shunted into offshore tax havens is a remarkable outcome.”42
Risk Transfer
Higher costs of PPP finance are justified on the basis risk is ‘transferred’ from the public to the private
sector. But in reality the private sector insists on government guarantees which ensure all the risk is borne
by the public, rather than private companies. The IMF observe:
“Government guarantees provided in connection with PPPs are a major source of fiscal risk. The risks
incurred by the private sector in connection with PPPs can be reduced or eliminated through explicit
government guarantees.
38
http://www.independent.co.uk/news/uk/politics/exclusive-how-private-firms-make-quick-killing-from-pfi-9488351.html
http://www.theguardian.com/politics/2011/sep/01/private-finance-initiatives-tax-havens-public-accounts-committee
40 http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news/pfi-reportpublication/
41 http://news.bbc.co.uk/2/hi/business/2263208.stm
42 Brooks, R. The Great Tax Robbery. 2013
39
9
“Most commonly with PPPs, financing risk is reduced through loan guarantees, demand risk is reduced
through guaranteed minimum payments for services sold to the public, residual value risk is reduced by
government guaranteeing a price at which it will purchase an asset when the operating contract ends.”43
3. Other negative impacts of UK PPPs
“Every penny paid to a PFI company is money withdrawn from those waiting for an operation, money
removed from the training of clinicians, and money denied for life-saving treatments. Much of the PFI debt is
now owned offshore, to avoid paying tax on the profits generated from the taxes you and I pay. Huge profits
from public money are being made by tax dodgers.”44
Leader of the official opposition in the UK, Jeremy Corbyn MP
Ownership and control of public infrastructure has profound political, social and financial implications for
public service provision and democratic accountability. PPPs result in profit driven, market logic within an
increasingly corporatised public service management layer. Considerations such as public safety and
satisfaction are subordinated to meeting ring-fenced, contractual repayments to PPP providers.
Financial pressures of PPPs drive declining service standards and staffing levels
As a result of PPPs, staff culture (reported bullying), staffing levels and service standards have declined in
the UK, as spending on variable costs (staffing and services) are reduced to meet ring-fenced, inflation linked
debt repayments.
NHS academic Allyson Pollock observes:
“No evidence PFI increased overall levels of service. On the contrary, its use in the NHS had two main effects.
It has displaced the burden of debt from central government to NHS trusts, with it the responsibility for
managing spending controls and planning services, thereby hindering a coherent national strategy. Secondly,
the high cost of PFI schemes presented NHS trusts with an affordability gap. This has been closed by external
subsidies, diversion of funds from clinical budgets, sales of assets, appeals for charitable donations, and,
crucially, by 30% cuts in bed capacity and 20% reductions in staff in hospitals financed through PFI.”45
PPPs hollow out state capacity to design, build, finance and operate infrastructure
When the UK government designs, builds, finances and operates new public infrastructure, in-house
provision by public servants is no longer the default option.
Dexter Whitfield of the European Services Strategy Unit finds the long-term impacts of PPP for society and
workers in the UK public sector include46:
• Further erosion of democratic accountability and transparency due to “commercial secrecy”
• Decline in public sector employment
43
https://www.imf.org/external/np/fad/2004/pifp/eng/031204.pdf
https://www.theguardian.com/commentisfree/2015/aug/26/pfi-labour-nhs-health-service-private-finance-initiative
45 http://www.bmj.com/content/324/7347/1205.full?sid=ce62e06c-b399-4858-b8ee-02ecf2fdb17a
46http://www.european-services-strategy.org.uk/outsourcing-ppp-library/pfi-ppp/financing-infrastructure-21st-century/financeinfrastructure.pdf
44
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• Commercialising community services usually provided free by schools (ie, sports ground use)
• Decline of in-house public service delivery as services are transferred to the private sector
• Reduced capacity of public sector due to reduced knowledge transfer
• Loss of benefit of local production and supply chains in the local/regional economy
• Bigger private sector role in regeneration and management of public sector assets
• Growth of a corporate welfare complex as a result of the expansion of a contracting culture
Erosion of democratic accountability
PPPs erode democratic accountability in public service delivery, with community organisation and
staff/trade union consultation and involvement in the planning, business case development and
procurement processes increasingly restricted.
The complex, technical nature of PPPs impose professional barriers on participation – finance, legal,
technical – meaning many civic minded people are excluded from involvement. PPPs lead to consultants and
advisers adopting a very influential role with little accountability or public scrutiny.
‘Commercial confidentiality’ makes access to PPP contracts and comparisons between public and private
sector performance almost impossible, as quality and level of service, staffing levels, pay and conditions and
other factors which determine performance are extremely difficult to obtain from PPP contractors.
Despite the continuation of PPP in the UK, albeit new projects are now at a much reduced level, the policy is
deeply unpopular. Polling of public attitudes towards abusive corporate practices in England and Scotland,
conducted by Liverpool University47 find:
●
●
68% of English respondents say PFI arrangements for funding public projects should be banned48
In Scotland with its higher concentration of PFI projects, 76% of the Scottish public want current PFI
arrangements banned49
PPP contracts are inflexible
In numerous cases PPP facilities sit empty after cuts to public services, long after the deals were signed,
rendering the use of buildings such as schools, police and fire facilities obsolete. Taxpayers are left to foot
the bill for decades of repayments - for buildings, which due to the strict terms of the contracts, cannot be
converted to other uses. Cases include:
47
https://www.crimeandjustice.org.uk/sites/crimeandjustice.org.uk/files/Redefining%20corruption%20briefing%2C%20May%202016.
pdf
48
https://www.crimeandjustice.org.uk/sites/crimeandjustice.org.uk/files/Redefining%20corruption%20briefing%2C%20May%202016.
pdf
49 http://bellacaledonia.org.uk/2016/05/17/scotland-redefines-corruption/
11
●
Weymouth East Police Station in Dorset that, while empty, is costing local police $2.63 million a year in
fees and charges, enough to hire a further 60 police officers.50
●
A Belfast PFI school which closed after seven years, where the contractor must be paid $462,500 a year
for the next 16 years for the unused and empty facilities.51
4. PPP case studies
4.1 Transport: M25 - Orbital Ringway extension in Greater London
Background: The M25 or London Orbital Motorway is a 117-mile (188 km) motorway encircling Greater
London. In 2006 the Highways Agency proposed to widen 63 miles (101 km) of M25 from six to eight lanes,
as part of a Design, Build, Finance and Operate PFI.52
Financial Close: In 2009 a $7.75 bn contract was signed with PFI consortium Connect Plus53
Problems: Tenders were received for the M25 PFI in autumn 200754as the first signs of the global credit
crunch emerged. Tenderers' funding plans were developed and submitted based on pre-credit crunch
financial terms and models. Banks increasing reluctance to lend long-term was not factored in.
The funding competition to attract private capital for the project was run by Connect Plus, with HSBC, PwC
and Partnerships UK providing support. When the risk of insufficient capacity in commercial banking markets
became clear, the UK government was forced to provide bridging finance to private financiers and lent
$625m to the project as a co-funder.55
Government intervention was required to address both the ‘liquidity’ problem, or lack of private finance,
and the ‘affordability gap’ given the increased cost of private finance during the crisis.
The M25 project financing cost increased from $5.63 billion to $7.75 billion between project scoping in 2006
and financial close in 2009, even though the Bank of England interest rates and UK government borrowing
rates were falling at the time. Margaret Hodge MP, then Chair of the UK parliament’s Public Accounts
Committee said: “higher interest rates accounted for well over half of that cost.”
Key Lessons
50
http://www.dorsetecho.co.uk/news/10624929.Underused_and_empty_buildings_cost_Dorset_Police___2_1m_a_year/
http://www.telegraph.co.uk/news/health/news/8779598/Private-Finance-Initiative-where-did-all-go-wrong.html
52 http://webarchive.nationalarchives.gov.uk/20081107095325/http://www.highways.gov.uk/roads/7717.aspx
53 https://en.wikipedia.org/wiki/M25_motorway
54 http://www.pfie.com/m25-lessons-and-challenges/21073479.fullarticle
55 http://www.pfie.com/m25-lessons-and-challenges/21073479.fullarticle
51
12
As witnessed during 2008/09, banks lend money into a booming economy, but withdraw lending during a
crisis; placing PPP contracts in procurement phase in jeopardy. This prompts concessions from the
government in the form of increased interest rates and profit margins and underwriting project financial
risk.
On the M25, the Highways Agency was forced to move away from its standard position not to intervene in
the case of contractor default.56 The ‘risk transfer’ in PPP, where the risk of a project defaulting is
supposedly transferred from the state sector to the private sector, was borne by the government.
The UK’s National Audit Office observe “most budgets are set 2-3 years in advance but large capital projects
are planned over longer timescales, so decisions about the project have to be made before budgets are
agreed. Several years can pass between the decision to use private finance and the process to determine the
final cost of private finance, by which time there is no practical mechanism to reconsider the choice of
finance.”57
Concessions from the government to PPP providers during crises reduce State capacity to stimulate new
spending in the economy, as public capital is withheld to underwrite existing planned works, supposed to be
financed by private capital.
4.2 Education: Edinburgh Schools Partnership PPP
Background: Scotland has higher per-capita expenditure on PPP than any other UK region.58 In education
PPPs, Labour MP Stella Creasy notes: “Scotland has 40% of PFI schools, with just 8.5% of the [UK]
population.”59
Problems: The social and financial costs of PPP projects to Scotland emerged in Edinburgh in March 2016
when the brickwork facade of Oxgangs primary school collapsed during a storm. Usually a busy play area for
children, only the good fortune the collapse occurred over a weekend, prevented serious injuries.
56
http://www.pfie.com/m25-lessons-and-challenges/21073479.fullarticle
https://www.nao.org.uk/wp-content/uploads/2015/03/The-choice-of-finance-for-capital-investment.pdf pg 8
58 http://www.sps.ed.ac.uk/__data/assets/pdf_file/0008/64349/Hodge_Chap_14.pdf
59 http://www.dailyrecord.co.uk/news/politics/gerry-hassan-election-campaign-random-7773586
57
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The cause of failure? The construction firm on the Edinburgh Schools Partnership - Miller Construction was
allowed to “self certify” buildings met local authority building safety standards - without building inspectors
visiting the site to observe the work.
In their haste to complete the project and minimise costs, builders forgot crucial wall ties, providing
structural integrity to the building. Urgent safety inspections were carried out by authorities across
Edinburgh, resulting in 17 PPP schools being closed to students due to structural faults identified by
inspectors.
Edinburgh Schools Partnership issued a statement deeming Miller Construction’s work “unacceptable”. It
said: “The standard of building work carried out by Miller Construction is completely unacceptable and we
are undertaking full structural surveys on all PFI schools to determine the scale of the problem.” 60
In response to the Oxgangs school collapse, Scottish First Minister Nicola Sturgeon MSP said:
“The priority is to get children back to school ASAP and give parents all necessary assurances” but “questions
must be asked, and in due course answered, about old PFI contracts that many feared put profits before
quality.”61
Key Learning - Commercial Secrecy and Failures in Information Sharing
60
61
http://www.constructionmanagermagazine.com/news/unacceptable-stan1dards-fou2nd-four-edinbur4gh-pfi/
http://www.constructionmanagermagazine.com/news/unacceptable-stan1dards-fou2nd-four-edinbur4gh-pfi/
14
Edinburgh Schools Partnership demonstrates the potentially fatal implications of failure to share
information between PPP providers, and public authorities that commission and run facilities.
Structural problems which closed 17 Edinburgh schools were detected at another Miller Construction built
school in Glasgow in 201262 yet failure of Miller Construction to share information with Edinburgh Schools
Partnership meant the chance to inspect the schools for signs of problems was lost.
25 years into PPP, Edinburgh Schools throws up wider questions about the quality of construction and value
for money of buildings obtained. Questions which without a comprehensive national audit of PPP building
safety, will remain unanswered.
4.3 Health: Peterborough Hospital
Background: More PPP deals have been signed in the UK National Health Service than any other sector.
Treasury data records $14.5 billion of investment in hospital facilities, with total repayment costs of $99.5
billion.63
Problems: In 2013, a UK parliament Public Accounts Committee report blamed "complete lack of strategic
oversight"64 for a decision by the Department of Health (advised by PwC) to build a new PPP hospital in
Peterborough - opening in 2010.
The National Audit Office suggest “poor investment decisions may be encouraged across the public sector,
because PFI allows government departments and public bodies to make big capital investments, without
committing large sums upfront.”65
The PPP was approved, despite a takeover of nearby Hinchingbrooke Hospital by Circle Healthcare (a private
for-profit provider66audited by PwC67) with no consideration for the impact two operational hospitals in
close proximity would have on local health spending. The two hospitals were just 24 miles apart, within an
area recognised to already have more healthcare services than were needed,68casting the need for new
hospital facilities into doubt.
The Public Accounts Committee said: "the decision to approve these two deals flies in the face of past and
present government policy to treat more people outside hospitals and left Government with two hospitals
whose financial viability and future is in doubt and whose value for money has not been secured".69
62http://www.scottishconstructionnow.com/11851/same-edinburgh-schools-defects-found-in-miller-built-glasgow-school-in-2012/
63
https://www.theguardian.com/news/datablog/2012/jul/05/pfi-contracts-list
64http://www.pharmatimes.com/news/pac_slams_catastrophic_decisions_at_peterboroughhinchingbrooke_trusts_1004395
65
https://www.nao.org.uk/report/lessons-from-pfi-and-other-projects/
https://www.theguardian.com/commentisfree/2012/jun/29/pfi-crippling-nhs
67 http://www.circleholdingsplc.com/uploads/document/file/52/circle_holdings_annual_report_2013_finalv.pdf
68 http://www.pharmatimes.com/news/pac_slams_catastrophic_decisions_at_peterboroughhinchingbrooke_trusts_1004395
69http://www.pharmatimes.com/news/pac_slams_catastrophic_decisions_at_peterboroughhinchingbrooke_trusts_1004395
66
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Peterborough and Stamford Trust PFI Hospitals became operational in December 2010, but, by the end of
2012, had already piled up a $57.25 million deficit.70 Cost overruns and problems at Peterborough and
Stamford PFI Hospital continue, with hospital privatisation the proposed solution.71
Jonathan Fielden, chair of the British Medical Association's consultants' committee said PFI debts are
"distorting clinical priorities" and “impacting the treatment given to patients.”72
In July 2016, the BBC reported fire-safety problems at Peterborough hospital, after it was discovered fireresistant compartments, designed to withstand 60 minutes of fire were deficient, with hundreds of holes in
fire barrier walls resulting in 1200 separate faults.73 An enforcement order was issued by authorities for
Peterborough Hospital to comply with fire standards, but work will not be completed until 2019.
Peterborough Trust refused to be interviewed by the BBC, acknowledging failure to recoup costs of repairs
from the PFI consortium - Progress Health - despite costs being recoverable under the contract terms.
Key Learning - The Risk of Poor Advice and PFI Failure Remain with the Public Sector
PPP facilities are being built without compelling evidence of public need. Despite contractual obligations,
risk and costs of fixing problems with PPP facilities are ultimately borne by the public sector.
Rather than advisor PwC taking responsibility for a list of failures at Peterborough Hospital, problems
created further opportunities for consultants to profit at taxpayers expense. PwC, who assisted
Peterborough entering the PPP, was recommissioned to come back and clean up its own mess.
5. The change in the UK’s approach(?)
The UK has made two attempts to introduce new infrastructure models to replace PFI following its
widespread criticism. The Non-Profit Distributing (NPD) model, from 2007 in Scotland, and PF2 in England
and Wales from 2012. However, neither model adequately addresses fundamental flaws of PPPs, namely
expensive private finance, and costly and inflexible private service provision.
Non-Profit-Distributing (NPD) Model - Scotland (developed by Scottish Futures Trust)
The NPD infrastructure model was the Scottish National Party (SNP) alternative to PFI, which the SNP had
strongly criticised in the run-up to gaining power in the 2007 Scottish elections.
70http://www.pharmatimes.com/news/pac_slams_catastrophic_decisions_at_peterboroughhinchingbrooke_trusts_1004395
71https://www.hsj.co.uk/hsj-local/acute-trusts/peterborough-and-stamford-hospitals-nhs-foundation-trust/hinchingbrooke-style-
franchise-considered-for-peterborough/5063167.article#.UjquRMZJNVk
72 http://news.bbc.co.uk/1/hi/programmes/file_on_4/6740895.stm
73 http://www.bbc.co.uk/programmes/b07j537j#play
16
NPD was conceived by the Scottish Futures Trust to replace PFI as “a vehicle that "could design, build,
finance, operate, manage and own the facilities created." An all-singing, all-dancing national public
investment company”74
Instead, the Scottish Futures Trust became co-ordinator between the government and the private sector,
employing a revised version of PPPs, which removes the expensive private equity finance component.
Edinburgh University PPP expert Dr Mark Hallowell is critical of NPD stating private equity (or 'shared
capital') only "made up roughly one per cent of project financing under PFI" - the government contract for
services being where the big profits were and still are being made.75
PF2 - England and Wales
PF2 was announced in December 2012 by HM Treasury as a replacement for PFI in England and Wales,
hailing a “new approach to public private partnerships.”76
In reality, PF2 does little more than rebrand PFI, increasing the costly equity component of PFI so the public
sector can share in windfall gains, whilst standardising template PFI contacts.
Hexham PFI Contract Buyout
In 2014, Northumbria NHS Trust borrowed $142.577million from the local council to pay off private
contractors who built and ran Hexham General Hospital, the first hospital to successfully do so.
Hexham Hospital was opened by Tony Blair in 2003. Built for $63.75m, under the terms of the 32 year PPP
contract, repayment costs would have totaled $311.4m by the end of the contract in 2033.
The $142.5m borrowed compensates the PPP consortium – Lend Lease and Uberior, while saving the trust
$83.8m78or $4.4million per year for 19 years.79 The UK Government imposed strict terms that the PPP
consortium would be repaid in full for the remainder of the contract. Despite this, the public sector saved
money through the buyout, because of lower headline interest rates on UK Government loans, than typical
PFI rates of 7-8%.
The Isle of Skye Toll Bridge Buyout
The Toll Bridge linking the Isle of Skye to the Scottish mainland was the first UK PPP project constructed.
Unlike typical UK PPPs, the operators were repaid exclusively via toll income, not through Government
repayments.
74https://www.commonspace.scot/articles/3294/why-ons-ruling-set-kick-start-new-debate-about-scottish-governments-investment
75
https://www.commonspace.scot/articles/3294/why-ons-ruling-set-kick-start-new-debate-about-scottish-governmentsinvestment
76https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/205112/pf2_infrastructure_new_approach_to_
public_private_parnerships_051212.pdf
77 www.ft.com/cms/s/0/cc4f10b2-4951-11e4-8d68-00144feab7de.html+&cd=1&hl=en&ct=clnk&gl=it#axzz4HRE24CD2
78 http://www.arlingclose.com/insights/item/view/nhs-trust-borrows-from-council-to-get-out-of-pfi-deal/
79 http://www.arlingclose.com/insights/item/view/nhs-trust-borrows-from-council-to-get-out-of-pfi-deal/
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Opened in 1995, at a capital cost of $48.8million,80 very high tolls to use the bridge ($14.25 for a return
journey of 1km by the year 2000) led to a decade of protests by enraged locals, over 500 arrests, and 130
members of the community prosecuted and jailed for refusing to pay excessive toll.81
In December 2004, the Scottish Government was forced to scrap the tolls, buying the bridge from Bank of
America for $33.8million. As well as the buyout payment, in the time that it owned the bridge, the
contractor collected $41.6 million in tolls, against costs of $4.4 million.82
6. Conclusion
PPPs in the UK have delivered public infrastructure with a capital value of $70.6 billion. But this is not for
free. The government is committed to paying to use the infrastructure at much higher rates than if it had
borrowed the money itself. Furthermore, some PPP infrastructure, as in Edinburgh, is already collapsing.
Through PPPs, public assets are now controlled by offshore investors located in tax havens. Some assets,
taxpayers will never own, because the PPP was only an expensive lease agreement.
PPP reflects the assumption corporate financial interests and the public interest are synonymous. Jean
Shaoul, professor at Manchester Business School says PFIs have been “an enormous financial disaster in
terms of cost” adding: “Frankly, it’s very corrupt... no rational government, looking at the interests of the
citizenry as a whole, would do this”83
A growing pile of evidence from the UK parliament’s Treasury Select Committee and Public Account
Committee, and the UK government’s National Audit Office, confirms PPPs have failed to deliver value for
money, have created outcomes heavily skewed in favour of private interests, and are built upon optimistic
models and assumptions bearing little resemblance to reality.
UK PPPs are used, abused, rebranded and continued in the UK and held up and promoted as a success story
abroad by development and aid institutions.
Politicians, NGOs and officials in developing countries tasked with overseeing infrastructure policy regarding
use of PPP should keep in mind when reading the glossy brochures from the City of London financial lobby
that the UK is the largest exporter of financial services globally. This goes some way to explain how PPP can
be marketed as a UK success story abroad, while UK citizens demand PPPs come to an end.
80
http://news.bbc.co.uk/2/hi/uk_news/scotland/4112085.stm
https://en.wikipedia.org/wiki/Skye_Bridge
82 http://news.bbc.co.uk/2/hi/uk_news/scotland/4112085.stm
83 http://www.independent.co.uk/money/loans-credit/crippling-pfi-deals-leave-britain-222bn-in-debt-10170214.html
81
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